The term issued shares to authorized shares ratio refers to a measure that allows the investor-analyst to understand if a company may need to seek authorization to issue more shares of common stock in the future. The issued shares to authorized shares ratio may foreshadow the dilution of shares.
Issued Shares to Authorized Shares Ratio = Total Issued Shares / Total Authorized Shares Equity
Capital structure and solvency measures allow the investor-analyst to understand the company's ability to remain in business in the long term. This is usually assessed by examining the relationship between debt, equity and the proportions of different types of stock. Solvency is the ability to continue operating, which oftentimes depends on cash flow. One of the ways to understand if the capital structure of a company may be changing is by calculating their issued shares to authorized shares ratio.
The issued shares to authorized shares ratio allows the investor-analyst to understand if a company is approaching the limit of their authorized shares and may have to seek permission to authorize the issuance of more shares of stock in the near term. When a company issues additional shares of common stock, the ownership of existing shareholders is diluted; potentially lowering dividends in addition to earnings per share. Typically, issuing additional shares of common stock, or increasing the number of authorized shares is frowned upon by existing shareholders since the value of their holdings is reduced.
The manager of a large mutual fund would like to better understand if Company ABC's may have increase the number of authorized shares of common stock to pay for management's stock awards in the coming year. Over the last several years, Company ABC provides their leadership with 125,000 shares in stock options. The fund manager asked his analytical team to examine Company ABC's latest proxy statement to understand the risk of shares dilution.
The analytical team learned Company ABC was authorized to issue 10,500,000 shares of common stock, it has issued 9,300,000 shares, 15,000 stock warrants, 190,000 shares possible via conversion, and 775,000 stock options. Using this information the team calculated the issued shares to authorized shares ratio as:
= 9,300,000 + 15,000 + 190,000 + 775,000 / 10,500,000
= 10,280,000 / 10,500,000, or 97.9%
When adding the forecasted 125,000 of stock options, the team calculated the ratio as:
= 10,280,000 + 125,000 / 10,500,000
= 10,405,000 / 10,500,000, or 99.1%
Based on this information the fund manager asked his team to assess the 775,000 stock options to better understand the likelihood they will ever be in the money.