Has the number of shares outstanding increased markedly over the past several years?
If so, the firm is either issuing new shares to buy other companies or granting numerous options to employees and executives. The former is a red flag because most acquisitions fail, and the latter is not something you want to see because k means that your ownership stake in the firm is slowly shrinking as employees exercise their options. If shares outstanding are consistently increasing by more than around 2 percent per yearassuming no big acquisitionsthink long and hard before investing in the firm. However, if the number of shares is actually shrinking, the company potentially gets a big gold star. Firms that buy back many shares are returning excess cash to shareholders, which is generally a responsible thing to do. Just be careful that the company isn’t going hog-wild with share repurchases even as their shares keep zooming ever upward because stock repurchases are a good use of capital only when the company’s shares are trading for a reasonable valuation. You don’t want to see
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