This week, a reader of “Choose Stocks Wisely,” wrote me and offered a great suggestion for the post I’m doing today. He brought to my attention the 7 for 1 stock split recently accomplished by Apple, Inc. (symbol AAPL). APPL had traded well over $600 per share before the split of June 9th but since has traded below $100 a share, reflecting the split.

This friend brings up an important issue with regard to using my Adjusted Floor Price Scorecard. He had just run the Scorecard and determined the adjusted floor price on AAPL to be “above” the current (post-split) stock price, meaning that AAPL might be a buy, at least based on the Scorecard result. He had, however, used the “pre-split” number of shares outstanding (see my blog post, “Stock Share Terminology” from early April) in his Scorecard calculation. He correctly surmised that the shares outstanding for the Scorecard needed to be the new 7-fold number following the split and not the pre-split share count he had used.

Using the updated number of shares, the adjusted floor price is actually “below” the current (post-split) stock price, meaning that AAPL does not satisfy my adjusted floor price. My adjusted floor method, of course is just one method, and does not mean that AAPL would not be a company that meets the investment criteria of many investors other than myself. (Indeed, AAPL is a financially solid company and is shown to be by my quality standards in parts A and B of the Scorecard. It’s due to my “cheapness” standards in parts C and D that AAPL falls short of my ultra-frugal taste.)

The friend who wrote me was working with the most recent financial statements, dated March 29, 2014. At that time, the number of shares outstanding was approximately 900 million. After the 7 shares for 1 share forward split accomplished this June, the number of shares outstanding is 7 times the pre-split number, or over 6 billion.

There are 9 inputs for the Scorecard: cash amount; current asset amount; total asset amount; current liability amount; total liability amount; goodwill amount; intangibles (other than goodwill) amount; number of outstanding common shares; and earnings per share (EPS).

Two of the 9 inputs are directly affected by a stock split, namely the number of outstanding common shares and EPS. The remaining 7 Scorecard inputs reflect balance sheet “amounts” and therefore are not altered by the 7 for 1 split. The number of shares outstanding has been changed as a result of the split to over 6 billion shares from the previous number just under 900 million. Also, since the EPS is based on the number of shares outstanding, the post-split EPS numbers are reduced to equal 1/7 of the pre-split EPS estimates.  This is because earnings are now being spread over a share count that is 7 times what it was prior to the split.

I noted at finviz.com today that its site has updated the number of shares to the 6+ billion outstanding count, but has yet to reduce the eps estimate for next year by dividing it by 7.  Yahoo finance, on the other hand, already shows the EPS estimate to have been adjusted for the split. This highlights the significance of the reader’s correspondence I’m addressing here in this post.

So, please keep in mind that a decision by a company to split its share price will alter the number of shares outstanding and therefore all per share calculations. With regard to my Scorecard, it involves making sure that, if a split has occurred, you are inputting the post-split number of shares outstanding and the post-split EPS figure.  Again, the other 7 “amount” inputs would not be changed by the split.

I always deeply appreciate the helpful comments and suggestions I receive at my website.  May God bless you.