Definition:

Shares Outstanding (Diluted Average) refers to the total number of shares a company has issued and is available for trading, including all possible shares that could be created through the conversion of convertible securities, options, or warrants over a specific period, typically a fiscal year.

Formula:

Diluted Average Shares Outstanding = Basic Shares Outstanding + Convertible Securities + Stock Options + Warrants

How to use the metric:

This metric is used to calculate diluted earnings per share (EPS), which provides a more conservative view of a company's profitability by considering all potential shares that could be created. It helps investors understand the potential impact of dilution on their ownership and earnings per share.

Limitations:

The metric can be less reliable if the company's convertible securities, options, or warrants are unlikely to be converted into shares. It may also not accurately reflect future dilution if the company's financial situation changes significantly.

Applies to:

This metric is applicable across most industries, especially those with significant stock-based compensation or convertible securities, such as technology and biotech sectors.

Doesn't apply to:

Industries with minimal stock-based compensation or convertible securities, such as traditional manufacturing or utilities, may find this metric less relevant. In these industries, the potential for dilution is often lower, making basic shares outstanding a more straightforward measure.

Summary:

Shares Outstanding (Diluted Average) is a crucial metric for assessing a company's potential share dilution and its impact on earnings per share. While it provides a conservative view of profitability, it may not always accurately predict future dilution, particularly in industries with minimal convertible securities or stock-based compensation.