A small training case.
Year 1: the company earned $100 million and had 100 million shares outstanding. EPS = $1.
Year 2: profit grew to $110 million, but the number of shares after options and a new issuance increased to 115 million. Diluted EPS is already about $0.96.
Total profit grew by 10%, and the portion of profit allocated per share decreased.
That’s why, before valuing bStock, I check not only net income, but also the average and diluted number of shares. Buybacks can reduce the denominator, while stock-based compensation and share issuances can increase it.
For a holder of an equity position, it’s important not only how much the pie grew, but also how many shares of it were divided.
#bStocks
Year 1: the company earned $100 million and had 100 million shares outstanding. EPS = $1.
Year 2: profit grew to $110 million, but the number of shares after options and a new issuance increased to 115 million. Diluted EPS is already about $0.96.
Total profit grew by 10%, and the portion of profit allocated per share decreased.
That’s why, before valuing bStock, I check not only net income, but also the average and diluted number of shares. Buybacks can reduce the denominator, while stock-based compensation and share issuances can increase it.
For a holder of an equity position, it’s important not only how much the pie grew, but also how many shares of it were divided.
#bStocks