Understanding share structure of publicly-trading companies
When considering a company for investment, many check out earnings and revenue growth, book value, assets/liabilities, etc. How many consider the ever important share structure? It's hard to say, but all investors SHOULD!
While, share structure isn't the most attractive point of analysis, it is crucial to understanding the public make-up of a company. Basic and diluted shares outstanding are the most fundamental pieces of share structure. Basic shares outstanding is how many shares of common stock the company has. Diluted shares outstanding is how many common shares are outstanding plus the number of convertible options that could become common shares outstanding. These option would dilute or lessen the value of each common share as they are converted to common stock.
As an example, say that a company has 25 million basic shares outstanding--a fairly good number for a small company. However, fully diluted, the company has 75 million shares outstanding. That means that there are 50 million shares worth of options that could be converted to common stock. Not so good any more.
A better scenario would be 25 million basic shares outstanding with no more than 30 million fully diluted. This means that there are options outstanding, but they are limited in number and will not dilute the per share metrics too much.
Another key piece of share structure is float. Float is the number of shares trading on the open market. Typically, the smaller the float, the lower the volume and the more volatile the stock will be. A low float typically alludes to higher insider ownership, which is the next piece to share structure.
Insider ownership is a good thing. Generally, the more stock insiders own, the better. It shows that they have faith in the company, that they believe the stock will appreciate and make them more money. So, when an insider is purchasing shares on the open market, it is usually a good sign. If an insider is vested in the company, he or she believes in it. Now, it is up to you to decide if you do too.
In order for a company to receive a point towards its Bowser Rating, it has to meet one of the following factors:
|Sales||Basic Shares Outstanding|
|$5 million to $10 million||2,000,000 to 2,500,000|
|$10 million to $30 million||2,500,000 to 3,000,000|
|$30 million and above||No more than 10% of sales|
Basic shares outstanding is a great place to start, but keep in mind, there is much more to share structure than that. The Bowser Rating system is a brief initial analysis of companies, but look much deeper before recommending a company, especially when it comes to share structure. Share structure is a make or break deal, so consider it in your analysis process.
Another great article on share structure can be found at MicroCapClub.com.
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Information in this blog post contains references to past Bowser recommendations. This blog post contains no recommendations, and instead relies on data gathered on past recommendations from sources thought to be reliable.