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Inconsistency with Shares Outstanding in Company 10-K Annual Reports

There are a few obstacles that can come up when using fundamental analysis to find stocks with both a solid business model and an adequate margin of safety. One that I noticed when I first started, and that I’ve been receiving numerous emails about from new Value Trap Indicator spreadsheet clients, stem from the inconsistencies of shares outstanding reporting in the annual reports.

shares outstanding

Before I explain that further, I want to emphasize the importance of doing the type of analysis that will be presented in this post. A prudent fundamental analysis approach starts with a stock idea (preferably from a stock screener), then involves inputting data from a 10-k annual report into a spreadsheet. From there, use the spreadsheet to calculate important metrics and ratios to help make a decision on a buy or sell.

The “inputting data into a spreadsheet” part is VERY crucial. Though there are plenty of tools that can do this for you, it’s imperative you do this work yourself.

Plugging in the numbers manually is a process that forces your brain to think about what’s going on in the financials. It helps you notice trends as you type them in, and make observations that you might not otherwise make from just a glance.

As you manually input data into a spreadsheet, your brain processes the numbers. It starts to form a picture in your head of the company’s health from its numbers. This is exactly what the financial data from a company does. It’s explicitly telling you what’s going on in the short term and long term of the company. It’s telling you the big picture of a company’s performance as well, but you have to look for it.

This isn’t just some idea in my head either. A famous academic model showed that the human brain learns best in the following ways (from best to worst): teaching –> doing –> hearing –> seeing/ reading. Doing is much more useful than seeing.

I’m also not alone in the idea of applying this to fundamental analysis. Martin Shrekli (yes the famous fraudster now in prison who you have to admit was/ is a master with company financials) posted an instructional video where he mentioned the importance of inputting data manually to “get a feel” for the numbers.

Now we know why we should care about this shares outstanding inconsistency. Let’s examine how it trips up investors.

How to Diagnose a Shares Outstanding Problem

I’m going to assume you already have a spreadsheet that automatically calculates financial metrics as you input the data. If you don’t, check out the Value Trap Indicator spreadsheet— which we will be using for the examples in this post.

Now, you should have metrics such as the P/E, P/B, and P/S that get produced in your spreadsheet. An easy way to check that you got the right numbers in is to check these calculations.

You should see realistic values here. What am I talking about? Most P/E’s will fall somewhere in the 10 – 100 range. If your spreadsheet is showing you P/E’s in 1,000 or 10,000 range, it’s off. Similarly if you’re seeing 0.001 – 0.01 for the P/E, it’s also off.

This will also be reflected in the P/B and P/S, which should be somewhere from 0.1 – 10 range, and can be in the 1,000s – 10,000s or 0.001s – 0.01s.

It’s a problem of scaling and is due to the variation in company financials. Not every company presents their data the same way, even though they do all present the same data.

In the “Consolidated Statement of Income”, which is where you should source your data in the 10-k, you will see the following somewhere in the header “figures in thousands” or “figures in millions”.

Some companies make it for us by keeping the shares outstanding and the rest of the financials in the same scale.

Take $AMZN for example. They present shares outstanding in the millions, and the rest of the financials in the millions. Like so:

AMZN same decimal place values

When inputted into a spreadsheet like the Value Trap Indicator, you see a normal range of valuation metrics.

But… sometimes companies present their financial data in the millions while the shares outstanding are in the thousands.

Like $AFL:

AFL 10-k example (1)

AFL 10-k example (2)

This causes the valuation metrics to calculate into something way off. Like this:

example-wrong-shares-outstanding

Once you spot an error like this, you must adjust the way you are inputting shares outstanding. If the shares outstanding is in the thousands and the rest of the data is in the millions, convert shares outstanding into a millions scale (move the decimal). For a stock like $AFL, that would look like this:

AFL-corrected-shares-out

After doing that, we see normalized valuation metrics. As you can see in the now updated VTI spreadsheet.

Sometimes, the company will just straight up present shares outstanding as it is– without presenting it in the millions or in the thousands. Again you must adjust the value so it is consistent. Move the decimal 3 places, if it’s still off move it 6 places.

If you’re lost when it comes to these decimal place values, Khan Academy has a great instructional video you can learn from.

I’m sure there’s more ways the numbers can get messed up from place values that I didn’t cover here. Just be smart about it, observe the valuation metrics that get calculated, and adjust the shares outstanding so that it is consistent.

If you’re still unsure, check something like the P/E ratio on a site like Yahoo Finance. If they report a P/E of say 17, you should see your P/E around the 10s (it won’t be exactly the same if you’re sourcing the annual report, as the shares outstanding may have changed since the company released their 10-k).

I did run across another interesting example of this from a Value Trap Indicator spreadsheet client based out of the UK.

How International Currency Can Fudge These Numbers

Here’s an example we ran across with the company PZC that trades on a UK exchange.

The shares outstanding scaling was actually right, but the share price wasn’t. The financials reported in the annual report were all in pounds (£), while the share price (as you can see on the ticker page) was in pence (p).

UK currency decimal places

So, once you converted the share price from pence to pound to be consistent with in the spreadsheet, you saw the correct number value scaling as you can see here:

UK currency pound vs pence

From doing hundreds and maybe even thousands of annual report analyses just like these, I remember these various shares outstanding inconsistencies to occasionally be a problem.

Once you’ve worked through it once though, it’s easy to fix the next time you see it.

I hope it was helpful. If you’re looking for a spreadsheet that can do some financial modeling for you, automatically calculate important metrics and then determine whether a stock is a buy or sell recommendation, pick up a Value Trap Indicator spreadsheet package. You can purchase one here, or read more about its functions here.

There’s a book that also comes along with the package, in both PDF and audio MP3 format, which explains exactly which metrics are used in the spreadsheet and teaches you why they are important for fundamental analysis.

It’s backed by my personal research on bankruptcies so that you can avoid losing your shirt in the stock market. It’s also sourced from important research by successful value investing fund managers– timeless strategies that continue to make investors around the world great money.