Preferred stock is not included in a company’s basic shares outstanding. That figure counts only common shares held by investors, and it is the denominator behind basic earnings per share and the standard market capitalization calculation. Preferred shares sit on the balance sheet in their own right, and they can enter the diluted share count when they carry a conversion feature, but the plain shares outstanding number you see quoted for a company refers to common stock alone.
What Basic Shares Outstanding Counts
Basic shares outstanding is a tally of common shares currently held by investors outside the company. Shares the company has bought back and holds in treasury are excluded. The figure anchors two of the most-watched numbers in investing: basic earnings per share, where it serves as the denominator, and market capitalization, which is share price multiplied by shares outstanding.
In financial reporting, the number isn’t a quarter-end snapshot. Under U.S. GAAP, companies use a weighted-average count of common shares outstanding across the reporting period.1Deloitte Accounting Research Tool. 3.3 Weighted-Average Number of Shares Outstanding That prevents a company from distorting per-share results by issuing a big block of stock in the final days of a quarter.
Why Preferred Stock Is Left Out
Common and preferred shares represent different economic interests. Common shareholders bear the residual risk: when earnings rise, they benefit, and when earnings fall, they absorb the loss. They also vote on major governance matters and sit last in line during a liquidation, behind creditors and preferred shareholders.2Securities and Exchange Commission. Description of Common Stock – Heritage-Crystal Clean, Inc.
Preferred shareholders hold a fixed claim. Their dividend is set, they typically don’t vote, and they have a liquidation preference that lets them recover a stated value before common holders receive anything.2Securities and Exchange Commission. Description of Common Stock – Heritage-Crystal Clean, Inc. Their dividend doesn’t grow when the business thrives, and their recovery in a wind-down is capped.
Basic EPS is designed to measure what each unit of residual ownership earned during the period. Putting preferred shares into the denominator would mix fixed-claim holders with residual-claim holders and produce a number that reflects neither group’s reality. So the denominator holds only weighted-average common shares, with no potential shares from convertibles, options, or warrants added in.1Deloitte Accounting Research Tool. 3.3 Weighted-Average Number of Shares Outstanding
Preferred Dividends Still Reduce Earnings Per Share
Preferred shares stay out of the share count, but they take a bite out of the numerator. Before computing basic EPS, a company subtracts preferred dividends from net income to arrive at “income available to common stockholders.” That adjusted figure is what gets divided by the common share count.3Deloitte Accounting Research Tool. ASC 260-10 – Income Available to Common Stockholders A company reporting $10 million in net income with $1 million in preferred dividends has only $9 million available to common shareholders.
The type of preferred stock determines when the subtraction applies. Cumulative preferred dividends accumulate whether or not the board declares them, so the amount that would have accrued during the period gets subtracted even in a year the company skipped the payment.3Deloitte Accounting Research Tool. ASC 260-10 – Income Available to Common Stockholders Noncumulative preferred dividends only reduce income when they’re actually declared.
The distinction matters more than it looks. A company with cumulative preferred stock will show a lower EPS even in years it doesn’t make the preferred payment, because the obligation still accrues. An investor who overlooks this can overstate how much of the company’s earnings belong to common shareholders.
Convertible Preferred Stock and the Diluted Share Count
Convertible preferred stock lets the holder exchange preferred shares for a set number of common shares. Until that conversion actually happens, the preferred shares stay out of the basic count. They do enter the picture for diluted EPS, which shows what per-share earnings would look like if every convertible security, option, and warrant were exercised.
Accountants use the “if-converted” method. The calculation assumes the convertible preferred was converted at the start of the reporting period, and two adjustments happen together: the denominator grows by the common shares the conversion would produce, and the numerator adds back the preferred dividends that were subtracted for basic EPS, because those dividends would no longer exist after conversion.4PwC Viewpoint. 7.5 Diluted EPS
If diluted EPS is noticeably lower than basic, convertible preferred is likely a sizable part of the capital structure and the potential dilution is worth watching. One rule to know: if including the convertible preferred would actually raise EPS rather than lower it, GAAP treats the security as anti-dilutive and leaves it out of the diluted calculation. The method is built to show worst-case dilution.
When a “Preferred” Share Gets Counted as Common Anyway
There is a narrow case where preferred stock does land in the basic share count. GAAP looks at the substance of a security, not just the label. A security that is legally structured as preferred stock but carries no meaningful liquidation preference, participates fully in the same economics as common stock, and otherwise has the characteristics of common equity should be treated as a class of common stock for EPS purposes.1Deloitte Accounting Research Tool. 3.3 Weighted-Average Number of Shares Outstanding
The reverse applies too. A security called common stock that carries a substantive preference making it behave like preferred shouldn’t be counted as an outstanding common share. The situation is uncommon, but when it appears, reading the share terms rather than relying on the label can change the per-share math.
Where Preferred Stock Shows Up Instead
Preferred stock may be absent from the shares outstanding line, but it sits plainly on the balance sheet. Its placement depends on the terms:
- Perpetual or non-redeemable preferred stock appears within stockholders’ equity, usually as a separate line above common stock, at par or stated value.5PwC Viewpoint. 5.6 Preferred Stock
- Mandatorily redeemable preferred stock is classified as a liability, because the company has a binding obligation to buy it back. It never touches the equity section.5PwC Viewpoint. 5.6 Preferred Stock
- Contingently redeemable preferred stock sits in “mezzanine equity,” between liabilities and stockholders’ equity, when redemption is triggered by an event outside the company’s control or at the holder’s option.
Companies also disclose the liquidation preference of each preferred issue on the face of the balance sheet. If you’re sizing up the portion of equity that actually belongs to common shareholders, start with total stockholders’ equity and subtract the preferred stock’s liquidation value. That gives a more honest picture than the headline equity number alone.