Average Diluted Shares Outstanding, so called ADSO is a financial metric that represents the average number of outstanding shares of a company's stock over a specific period, taking into account any dilutive securities that could potentially be converted into common shares, such as stock options or convertible bonds.
The ADSO calculation includes all outstanding shares, including those that have been issued but not yet vested, and any dilutive securities that could be converted into common shares. The calculation takes into account the time period during which the dilutive securities are outstanding and assumes that they will be converted into common shares at the end of that period.
To calculate the ADSO, the total number of outstanding shares is adjusted to account for the potential conversion of any dilutive securities. This adjusted number is then averaged over a specific period, typically a quarter or a fiscal year.
Company has 10 million outstanding shares at the beginning of the year. During the year, the company issues 1 million stock options that are exercisable at a price of $20 per share. The options are vested over a two-year period and will expire in three years.
To calculate the dilutive effect of the stock options, we need to calculate the number of additional shares that could be issued if all the stock options were exercised. We calculate this as follows:
Number of additional shares = (Option price - Market price) / Option price x Number of options = ($20 - $15) / $20 x 1,000,000 = 250,000
This means that if all the stock options were exercised, the company would issue an additional 250,000 shares.
To calculate the ADSO, we need to adjust the total number of outstanding shares to account for the potential dilutive effect of the stock options. We do this by adding the number of potential additional shares (250,000) to the total number of outstanding shares (10,000,000), giving us a total of 10,250,000 shares.
We then calculate the ADSO by averaging the adjusted number of outstanding shares over the entire year. Let's assume that the company had the following number of outstanding shares during each quarter:
Q1: 10,000,000 shares Q2: 10,100,000 shares Q3: 10,200,000 shares Q4: 10,300,000 shares
The ADSO for the year would be calculated as follows:
ADSO = (10,000,000 + 10,100,000 + 10,200,000 + 10,300,000) / 4 = 10,150,000
So the ADSO for the year is 10,150,000 shares.