Treasury Stock Method

The profit figure that most investors and Wall Street types care about most is called earnings per share, or EPS. It takes a company's net income (the absolute bottom-line number) and divides that by the number of shares the company has outstanding. It brings the profit figure down to the level of the shareholder.

The math is fairly simple: net income divided by the number of shares. However, the calculation can become intricate, mostly because the number of shares isn't always a straightforward figure.

You've got the number of shares that are out in the world. That number is easy enough to deduce. But you've also got things like employee stock options and warrants held by investors. These shares aren't out there yet, but they could be at any time. They are there, but...not there.

Enter the treasury stock method. This technique for calculating the number of shares used in the EPS equation takes into account the new shares that could come into existence through the options and warrants that haven't been exercised yet.
Once these shares are added into the total, they become the divisor in the earnings per share equation. The number that results is known as "diluted EPS." It represents the EPS figure as it would stand if everything were exercised and everyone's ownership stake was as diluted as it could be under the current obligations.