Adjustments to stock splits and issues

Stock splits and issues change the number of shares outstanding and, thus, make it unsuitable to compare company valuation items (e.g. EPS) before and after the stock split or issue. Hence, in order to make comparisons meaningful, the number of shares before the split or issue has to be adjusted to take into account the changed number of shares in the future year.

Reason for these steps and the order they should be done is that the share price is updated by the system every night. If you adjust the number of shares and leave the share price to be updated by the system, the Market Cap increases drastically at first (because of the old share price and increased number of shares) just to fall at the time the system updates the share price to be split-adjusted.

There are two steps you need to take to make required adjustments:

First, go to the Admin-page, enter a Tickers & Share Price and choose the ticker and click Modify. Change the new share price and click Update.

After updating the split-adjusted share price, you can go to make the following adjustments into your excel-model.

The adjustment is conducted with an item called Stock issue multiple as follows:

Enter a multiple to the Splits and stock issues row in the split or issue year. The multiple is determined as follows:

For e.g. 1:4 splits, the multiple is 4

For stock issues, the multiple is the ratio of the pre-issue share price and the post-issue share price (calculator)

Compute the Stock issue multiple (for pre-split or -issue years) by multiplying the following year´s Splits and stock issues multiple with the following year´s Stock issue multiple.

The next picture illustrates the adjustment process:


Notice that the order of these rows may vary over the time.

The adjustment has a straight effect on the following valuation items:

Number of shares (Series I and II, diluted and average)
Share price (Series I and II)
Dividend per share (Series I and II)

So, in adjusting the above items to stock splits and issues, different Valuation and Per share figures can be computed in a meaningful manner.

Remember also dividend forecasts!

After these changes you probably have one more thing to fix: you probably have estimated future dividends as an absolute figure for a couple of future years. Therefore you also have to manually adjust these to reflect new situation. Of course it might be that your dividend estimates are done with payout ratio and if that is the case, then you do not have to adjust them as payout ratio estimates are of course the same before and after the split.