Treasury Stock Method

A A A

DEFINITION

The component of the diluted earnings per share denominator that includes the net of new shares potentially created by unexercised in-the-money warrants and options. This method assumes that the proceeds that a company receives from an in-the-money option exercise are used to repurchase common shares in the market.

In order to comply with generally accepted accounting principles (GAAP), the treasury stock method must be used by a company when computing its diluted earnings per share (EPS).

INVESTOPEDIA EXPLAINS

The net of new shares that are potentially created is calculated by taking the number of shares that the in-the-money options purchase, then subtracting the number of common shares that the company can purchase from the market with the option proceeds. This adds to the total number of shares in the denominator and lowers the EPS number.

For example, assume that a company currently has in-the-money options that cover 10,000 shares with an exercise price of $50. If the current market price is $100, the options are in-the-money and, based on the treasury method, need to be added to the diluted EPS denominator. The proceeds the company will receive will be $500,000 ($50 x 10,000), which allows them to repurchase 5,000 shares on the market ($500,000/$100). Therefore, the net of new shares is 5,000 (10,000 option shares - 5,000 repurchased shares).


RELATED TERMS
  1. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding share of common ...
  2. Warrant

    A derivative security that gives the holder the right to purchase securities ...
  3. Generally Accepted Accounting Principles ...

    The common set of accounting principles, standards and procedures that companies ...
  4. Option

    A financial derivative that represents a contract sold by one party (option ...
  5. Diluted Earnings Per Share - Diluted ...

    A performance metric used to gauge the quality of a company's earnings per share ...
  6. Exercise Price

    The price at which the underlying security can be purchased (call option) or ...
  7. Billing Cycle

    The interval of time during which bills are prepared for goods and services ...
  8. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank holding companies ...
  9. Short Put

    A type of strategy regarding a put option, which is a contract that allows (but ...
  10. Amortization

    1. The paying off of debt in regular installments over a period of time. 2. ...
Related Articles
  1. The 5 Types Of Earnings Per Share
    Markets

    The 5 Types Of Earnings Per Share

  2. How To Evaluate The Quality Of EPS
    Markets

    How To Evaluate The Quality Of EPS

  3. Getting The Real Earnings
    Options & Futures

    Getting The Real Earnings

  4. An Introduction To The CMA Designation
    Professionals

    An Introduction To The CMA Designation

  5. Selling Premium As Small Caps Play Catch ...
    Options & Futures

    Selling Premium As Small Caps Play Catch ...

  6. Trade Like A Hedge Fund Master
    Options & Futures

    Trade Like A Hedge Fund Master

  7. Invest Like Madoff - Without The Jail ...
    Options & Futures

    Invest Like Madoff - Without The Jail ...

  8. Top 4 Most Competitive Financial Careers
    Professionals

    Top 4 Most Competitive Financial Careers

  9. How To Profit From Recent Market Divergence
    Options & Futures

    How To Profit From Recent Market Divergence

  10. Operating Profit
    Investing

    Operating Profit

comments powered by Disqus
Hot Definitions
  1. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
  2. Jeff Bezos

    Self-made billionaire Jeff Bezos is famous for founding online retail giant Amazon.com.
  3. Re-fracking

    Re-fracking is the practice of returning to older wells that had been fracked in the recent past to capitalize on newer, more effective extraction technology. Re-fracking can be effective on especially tight oil deposits – where the shale products low yields – to extend their productivity.
  4. TIMP (acronym)

    'TIMP' is an acronym that stands for 'Turkey, Indonesia, Mexico and Philippines.' Similar to BRIC (Brazil, Russia, India and China), the acronym was coined by and investor/economist to group fast-growing emerging market economies in similar states of economic development.
  5. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all of the plan’s risk – e.g.: retirement payment liabilities to former employee beneficiaries. The plan sponsor can do this by offering vested plan participants a lump-sum payment to voluntarily leave the plan, or by negotiating with an insurance company to take on the responsibility for paying benefits.
  6. XW

    A symbol used to signify that a security is trading ex-warrant. XW is one of many alphabetic qualifiers that act as a shorthand to tell investors key information about a specific security in a stock quote. These qualifiers should not be confused with ticker symbols, some of which, like qualifiers, are just one or two letters.
Trading Center