Treasury, Outstanding, Floating and Restricted Shares

A thing as simple as number of shares of a company can get as complicated as understanding the different types of shares company is reporting viz Treasury, Outstanding, Floating or Restricted Shares. Let us understand the difference between all these types of shares and their significance.

INTRODUCTION

Finance has a knack of making simple things complicated, and vice versa. So, you always thought that it should be simple to calculate the Earnings Per Share (EPS) of a company. And why not? It should be simple enough for any school student to divide the earnings of the company by the number of total shares of the company. 

The answer is Yes, and no. 

Because to be able to do this division, you ought to truly understand what the number of shares of a company are. If you think it is a number readily available in any financial report or on a financial portal, then be aware that there are many types of shares of a company, and only a specific type of share is what is used in the formula to calculate the EPS of a company.

There is no easy way out. You ought to understand the types of shares and then use the right number of shares to use in all your formula.

TREASURY SHARES  / AUTHORISED STOCK

When a company is set up, the board authorizes a total number of shares that are available for investors to own. These number of shares are called as Treasury Shares or Authorised Stock.

Example

- Let’s say you and a partner are setting up a company and you authorize that the company be set up with 1,000 shares. Initially, these are all called as Treasury Shares, i.e. shares that are in the company’s treasury, and not yet assigned to any investors.

- Now, you and your partner capitalize the company by exchanging your money, which goes into the company’s treasury, in exchange for shares which are issued from the company treasury.

- You could split the total shares between both of you i.e. 500 each, charging Rs. 10 per share so that between the two of you, the company now has Rs. 10,000 available to use on operating and growing the business.

- But you don’t have to issue all the shares that have been authorized.

- Another possibility would be to only issue half the shares, say 250 to each of you. Now, 500 shares have been issued and the remaining 500 shares are still in the treasury. You may want to do this because you might want the option of raising additional capital for the company at some point in the future, by selling (issuing) some, or all, of the shares that remain in the treasury.

A few more points worth noting about Treasury Shares:

a) Treasure Shares, also known as Authorized stock, is the maximum number of shares a corporation is legally permitted to issue.

b) Actions like Buyback of Shares also increases the Treasury Shares. The amount of treasury stock repurchased by a company may be limited by its nation's regulatory body - SEBI in case of India.

c) Treasury shares are not included in the distribution of stock dividends or the calculation of earnings per share (EPS). Treasury shares also have no voting rights.

d) Treasury stock can be retired or held for resale in the open market. Retired shares are permanently canceled and cannot be reissued later. Once retired, the shares are no longer listed as treasury stock on a company's financial statements. Non-retired treasury shares can be reissued through stock dividends, employee compensation, or a capital raising.

OUTSTANDING SHARES

Out of the total authorized stock, the shares that are actually issued from the treasury and owned by various investors are called outstanding shares. Since it is not necessary that all authorised shares are issued to investors, therefore the total outstanding shares may be very different than the total number of authorized shares.

As the name suggests, Outstanding shares are not owned by the company any more, and are an outstanding for the company.

These outstanding shares could be issued to : (a) public investors (called as Floating shares), or (b) employees within the organisation (called as Restricted Shares)

Therefore, 
Outstanding Shares = Floating shares + Restricted Shares

FLOATING SHARES

That part of the Outstanding Shares that can be sold and purchased from the open market are called as the Floating Shares. 
Its quantity may change depending on buyback offers by the company as well as issuing of new shares from authorized shares from within its treasury. 
Since the numbers can change dynamically through the year, these shares are nick named as floating shares.

RESTRICTED SHARES

Restricted shares (also nick named as RSUs for Restricted Stock Units) is a compensation issued by an employer to an employee in the form of company stock. Restricted stock units are issued to an employee through a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with their employer for a particular length of time. RSUs give an employee interest in company stock but they have no tangible value, until vesting is complete. The restricted stock units are assigned a fair market value when they vest. Upon vesting, they are considered as a regular income, and a portion of the shares is withheld to pay income taxes. The employee receives the remaining shares and can sell them at his or her discretion.
Restricted Shares are kept for these internal investors and are hence not freely trade-able. The trading of these shares require special permission from stock exchange before being transacted, and hence the nick name Restricted. 
So, while the number of Restricted shares can also change over time, the change is not as frequent as Floating Shares.

Example

Continuing with our example of a company that was setup with 1,000 authorized shares. Let us assume that the company now offers 300 shares in an IPO issue, gives 150 shares to executives, and retains the remaining. 
In this case, 
Authorized shares = 1,000

Promoters Shares = 150 (Restricted Shares)

Public stake = 300 (Floating Shares)

Treasury Shares = 550 (Balance shares)

Total Outstanding shares = 450 (150 + 300).

A few more things to understand about Outstanding Shares:

a) Outstanding shares are shown on a company’s balance sheet under the heading “Capital Stock”

b) The number of outstanding shares is used in calculating key metrics such as a company’s market capitalization, its earnings per share (EPS) etc.

VARIANCE IN OUTSTANDING SHARES

A company’s outstanding shares can fluctuate for a number of reasons. The number will increase if the company issues additional shares or goes through actions like Stock Splits. Companies typically issue shares when they raise capital through an equity financing, or upon exercising employee stock options (ESO) or other financial instruments. Outstanding shares will decrease if the company buys back its shares under a share repurchase program.

Actions can lead to change in the outstanding shares:

a) Stock Splits and Share Consolidation

The number of shares outstanding will increase if a company undertakes a stock split, or will reduce if it undertakes a reverse stock split. Stock splits are usually undertaken to bring the share price of a company within the buying range of retail investors; the increase in the number of outstanding shares also improves liquidity. Conversely, a company will generally embark on a reverse split or share consolidation to bring its share price into the minimum range necessary to satisfy exchange listing requirements. While the lower number of outstanding shares may hamper liquidity, it could also deter short sellers since it will be more difficult to borrow shares for short sales.

b) Stock Liquidity Constraints

For a blue chip stock, the increased number of shares outstanding due to share splits over a period of decades accounts for the steady increase in its market capitalization and growth in investor portfolios. Of course, merely increasing the number of outstanding shares is no guarantee of success; the company has to deliver consistent earnings growth as well.

While outstanding shares are a determinant of a stock’s liquidity, the latter is largely dependent on its share float. A company may have 100 million shares outstanding, but if 95 million of these shares are held by insiders and institutions (restricted shares), the float of only five million may constrain the stock’s liquidity.

c) Share Repurchase Programs

Often times, if a company considers its stock to be undervalued, it will institute a repurchase program, buying back shares of its own stock. In an effort to increase the market value of remaining shares and elevate overall earnings per share, the company may reduce the number of shares outstanding by repurchasing, or buying back those shares, thus taking them off the open market, and bringing them back to the treasury.

HOW TO LOCATE THE NO. OF OUTSTANDING SHARES

In addition to listing outstanding shares, or capital stock, on the company’s balance sheet, publicly traded companies are obligated to report the number of issued and outstanding shares and generally package this information within the investor relations sections of their websites, or on local stock exchange websites.

WEIGHTED AVERAGE OF OUTSTANDING SHARES

Since the number of outstanding shares is incorporated into key calculations of financial metrics such as earnings per share and because this number is so subject to variation over time, the weighted average of outstanding shares is often used in its stead in certain formula.

Example

Continuing with our example, for a company with 1,000 shares outstanding, if the company decides to perform a stock split in 1:2 ratio, thus increasing the total amount of shares outstanding to 2,000. The company later reports earnings of Rs. 2,00,000 in a particular financial year. I
t remains unclear which of the two variant outstanding share values to incorporate into the equation: 1,000 or 2,000. The former would result in an EPS of Rs. 200, while the latter would result in an EPS of Rs. 100. In order to account for this inevitable variation, financial calculations can more accurately employ the weighted average of outstanding shares, which is figured as follows:

Weighted Average of Outstanding Shares = (Outstanding Shares x Reporting Period A) + (Outstanding Shares x Reporting Period B)

In the above example, if the reporting periods were each half of a year, the resulting weighted average of outstanding shares would be equal to 1,500. Thus, in revisiting the EPS calculation, Rs. 2,00,000 divided by the 1,500 weighted average of outstanding shares would equal Rs. 133.33 in earnings per share.


SUMMARY
While formulas, ratios and numbers are important in value analysis, even more important is to understand the basis of those numbers so that we can compare apples to apples. Finance may seem complex to an outsider, but as you dig deeper, it is simple and logical.

Regards

Manoj Arora
Official Website