As true of a good number of my posts, this post will address a topic that stems from a conversation I very recently had with a book reader via my website e-mail.

Common stock shareholders in a company own the entity. There are different adjectives to describe different common stock share counts.  There are “authorized” shares, “issued” shares, “outstanding” shares and “treasury” shares.

Authorized shares refer to the maximum number of shares that a company can issue to the market. Issued shares refer to the number of authorized shares that have been issued to stock market participants. Outstanding shares are the issued shares that have not been bought back by the company and placed in the company treasury. Treasury shares are the issued shares that have been bought back by the company and held in its treasury.

Let’s put some numbers to this talk. A company authorizes 1,000 shares when the company is established. Of those 1,000 shares, it issues 600 shares to the market and they are also classified as outstanding shares. At this juncture, the company still has 400 shares it could issue at some future point. Of the 600 shares issued and outstanding, the company later buys back 100 shares for the company treasury. After the buyback, there remain 600 shares issued but of these 600 shares, only 500 shares are now referred to as outstanding shares. Thus, the number of issued shares at any point in time is equal to the outstanding shares plus the treasury shares.

All per share information is expressed on the outstanding share count. Price per share, earnings per share, cash per share, book value per share, etc. are all determined by using the outstanding share count as the denominator for the per share calculation.

It is important to keep in mind that treasury shares are part of the issued share count but excluded from the outstanding share count. Treasury shares don’t vote nor can they receive a dividend payment. Since treasury shares reduce the outstanding share count, earning per share (eps) of a company can be increased by a company buying its shares back from the market. While there are many other reasons for companies to buy shares back, it is worth remembering that treasury stock transactions can result in higher eps even if the earnings of the company remain flat.