Effect of adding two per share quantities

In summary: That is a great catch. So my mechanics was right but the logic was wrong.In summary, the conversation discusses the calculation of cash flow per share and the importance of considering the total number of shares in the calculation. The conversation also touches upon the concept of weighted averages and how they can affect the overall results.
  • #1
musicgold
304
19
Hi,

Please see the attached document.
In a simple calculation, I am trying to add the cash flow per share of two companies. I think I am doing something wrong as I am not able to reconcile the results of this calculation to the actual results. Can you please take a look?

Thanks,

MG.
 

Attachments

  • Scan001.PDF
    23.4 KB · Views: 210
Physics news on Phys.org
  • #2
"Per shares" is an average, the total cash flow divided by the number of shares. In general adding two averages is only sensible if they are averaged over the same thing. Without knowing the total number of shares in each case, addin "per share" information does not give you any useful quantity.
 
  • #3
HallsofIvy,

Thanks a lot. That is a great catch. So my mechanics was right but the logic was wrong.

1. I think I can get rid of that problem by adding gross amounts first and then calculating the per share amount. Is that correct?

2.
In general adding two averages is only sensible if they are averaged over the same thing
I understand what you mean here. The same problem occurs when we try to calculate the average of speed by simply averaging two speeds.
However I don't really understand what you mean by "over the same thing". Do you mean to say that both average calculations should have the same denominator? Can you give an example?
 
  • #4
By "averaged over the same thing", I mean with the same denominator.

Suppose company A "per share cash flow" is $5 per share and company B's is $7 per share. IF they are both based on, say, n shares, that is saying that company A's total cash flow was 5n dollars and B's is 7n dollars. They have a total of 5n+ 7n= 12n cash flow based on 2n dollars- the average is 12n/2n= 6 which is the average of 5 and 7.

But suppose A's is based on 1000 shares while B's is based on 2000 shares. Then A's total cash flow is $5000 and B's is $14000 for a total of $19000 based on 3000 shares- the average cash flow of both together is 19000/3000= 6.333, closer to B since B has the larger number of shares and carries more "weight" in the calculation.

(That is, in fact, a "weighted" average.)
 
  • #5
HallsofIvy,

Thanks a lot.
 

1. How does adding two per share quantities affect a company's financial statements?

Adding two per share quantities to a company's financial statements will increase the company's earnings per share (EPS). This means that the company's profits are spread out over a larger number of shares, making the company appear more profitable to investors.

2. What is the impact of adding two per share quantities on a company's stock price?

The impact of adding two per share quantities on a company's stock price can vary. In some cases, it may lead to an increase in the stock price as investors view the company as more profitable. However, it could also lead to a decrease in the stock price if investors believe that the increase in EPS is not sustainable.

3. How does adding two per share quantities affect a company's dividend payments?

Adding two per share quantities can impact a company's dividend payments in two ways. First, if the company has a fixed dividend policy, the increase in EPS may lead to an increase in the dividend amount. Second, if the company has a target payout ratio, the increase in EPS may lead to an increase in the dividend payout ratio.

4. What are the potential risks of adding two per share quantities?

One potential risk of adding two per share quantities is that it may be seen as a short-term boost to the company's financials rather than a sustainable increase in profitability. This could lead to a decrease in investor confidence and a decrease in the company's stock price. Additionally, if the company's earnings decrease in the future, the increase in EPS may be seen as artificial and lead to negative reactions from investors.

5. How can adding two per share quantities impact a company's future growth?

Adding two per share quantities can impact a company's future growth in a few ways. First, it may attract new investors who are interested in the company's increased profitability. Second, it may increase the company's stock price, making it easier for the company to raise capital for future growth. However, if the increase in EPS is not sustainable, it could negatively impact the company's growth in the long run.

Similar threads

I Did Math DF's integral calculator make a glaring mistake?
    • Calculus
Replies
8
Views
165
Wedge Anchor Torque Spec vs Ultimate Tension Spec
    • Mechanical Engineering
Replies
18
Views
980
I How to Combine Vector Directions for Animated Surfaces in OpenGL?
    • Calculus
Replies
6
Views
2K
Formula derivation connecting vertical water flowrate & horizontal distance moved by a suspended sphere
    • Introductory Physics Homework Help
6
Replies
207
Views
3K
How many alleles per gene the human species have today?
    • Biology and Medical
Replies
3
Views
2K
I I would like to know the calculation process of this power spectrum
    • Calculus
Replies
8
Views
1K
Thermodynamics Question Regarding Gibbs Free Energy, Enthalpy, Entropy
    • Biology and Chemistry Homework Help
Replies
1
Views
984
I How to convert density ratio of grams/ mm^3 into metric tonnes/ m^3
    • Mechanics
Replies
6
Views
1K
B How can scalars like voltage, impedance, etc. be added like vectors?
    • Electromagnetism
Replies
17
Views
507
How to convert Insulation Loss (in Watts/meter) to kWh energy savings per year?
    • Mechanical Engineering
Replies
13
Views
4K

Hot Threads

Recent Insights

Back
Top