65-Day Academy · Day 1 · Foundations
Shares Outstanding — Your Slice of the Pie
The pie can grow or shrink
A company's total value is split among all its shares outstanding. This matters because the number of slices changes. Companies issue new shares to raise cash or pay employees (dilution — your slice shrinks), and they buy back shares (your slice grows). A company whose share count grows 5% per year must grow the whole business 5% faster just for your slice to stay the same size.
Buybacks — real or cosmetic?
Buybacks only help you if the price paid is below intrinsic value. Buying back stock at inflated prices destroys value for remaining owners, even though earnings "per share" still rise. Check whether the share count actually declines over multi-year periods in the cash flow statement — that is the honest test.
What you'll practise
A company earns $1,000M in profit with 500M shares outstanding (EPS = $2.00). Next year it buys back 100M shares and profit is unchanged. What is the new EPS?
15 XP in the app · introductory
Sources
- Share BuybacksInvestopedia
- Buffett on buybacks (2018 letter)Berkshire Hathaway
Take this lesson graded in the app →
All lessons are for educational purposes only and are not individualized financial advice, a recommendation, or a solicitation to buy or sell any security. Options involve substantial risk and are not suitable for every investor.