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Creating a Portfolio Like Warren Buffett: A High-Return Investment Strategy by Jeeva Ramaswamy

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CHAPTER 15

Stock Research Checklist—Share Buybacks

Market capitalization is calculated using the number of diluted shares multiplied with the share price of the stock.

Market cap of the company = Diluted share count × Share price

For example, the market cap for a company with a $1 million diluted share count at $10 per share would be $10 million because $1 million multiplied by 10 is $10 million.

When a company is expanding or getting into trouble, it can raise capital by issuing equity or debt. When a company issues new shares, share dilution occurs. This can be detrimental to the existing shareholders. On the other hand, when a company is successful and generating enough profit, it can finance its expansion plans through its cash flow. You should be interested in that kind of company.

Are the Company’s Total Outstanding Shares Decreasing over Time?

Dilution can also occur because of existing senior management’s option grants. When a company’s senior management’s compensation consists of salary plus incentive-option grants, senior management and shareholder interests are aligned. But, in some companies the compensation committee approves a boatload of options to the senior management without increasing the bottom line of the company. In order to determine if this is happening, you need to read the proxy statements very carefully. When the board of directors and management are shareholder friendly, they have an option plan tied to improving the company’s bottom line. The company ...

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