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Treasury Stock

Treasury Stock Definition

The treasury stock definition is the shares a company buys of its own stock on the open market. Shares of treasury stock were issued by the company, and then repurchased. So consider it issued, but not outstanding. After a company repurchases shares of its own stock, there are fewer shares of its stock trading on the open market.

Treasury stock can either be retired (cancelled) or resold on the open market. In addition, the shares have no voting rights, and they do not pay or accrue dividends. It is not included in financial ratios that use the value of common stock.

Treasury Stock on the Balance Sheet

Record treasury stock in the owner’s equity section of the balance sheet. Then record it at cost – what the company paid to acquire the shares – and subtract the value of the treasury stock from the stockholders’ equity account. The treasury stock account is a contra-equity account.

Stock Buyback (Repurchase Shares; Buyback Shares)

There are several reasons why a company would repurchase its own shares, including the following.

1. A company might buyback shares if it considers its stock undervalued. If the stock is undervalued, then management might want to buy shares because they consider them cheap.

2. Fewer outstanding shares increase the value per share, so a company might buyback shares to benefit its shareholders. For tax reasons, a share buyback can be superior to paying dividends to shareholders. (Depending on the difference between the tax rate that applies to dividends and the tax rate that applies to capital gains.)

3. A company can also repurchase shares to exercise stock options or to convert convertible bonds.

4. You can use stock buyback to thwart a takeover – if a company buys its own stock, then that stock is no longer available to the potential acquirer.

5. A company can alter its debt-to-equity ratio by issuing bonds and using the proceeds to repurchase stock.

6. A stock buyback could also be a sign that the company has excess cash and no other viable investment opportunities.

Treasury Stock Definition

See Also:
Convertible Debt Instrument
Common Stock Definition
Reverse Stock Split
Preferred Stocks
Hedging Risk
Private Placement

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Earnings per Share (EPS)

See Also:
Price Earnings Growth Ratio Analysis
Price Earnings Ratio Analysis
Gross Profit Margin Ratio Analysis
Net Profit Margin Analysis
Financial Ratios

Earnings per Share (EPS) Definition

The earnings per share or EPS is the amount of profit that accrues to each shareholder based on their percentage ownerships or amount of shares owned within the company.

Earnings per Share (EPS) Explained

The earnings per share ratio is often a good measure of how a company is doing from year to year and is used by many investors in the market. However, companies know that the EPS is often a measure of how they are handling their businesses. This leads several companies to manipulate the EPS ratio. The ratio can be manipulated if the company were to buy or sell its own shares in the market, referred to as Treasury Stock. The net income aspect can also be manipulated through the recognition of revenue as well as other ways.

Earnings per Share (EPS) Formula

The EPS equation is as follows:
(Net Income – Preferred Dividends)/Shares Outstanding

Earnings per Share (EPS) Example

Tim is trying to calculate the EPS for Wawadoo Inc. He was given the following information to solve the problem.

Operating Income – $350,000
Interest expense – $20,000
Tax rate – 34%
Shares outstanding – 100,000 common (no preferred)

Tim will make the EPS calculation as follows:
$350,000 – (350,000 * .34) – $20,000 = $211,000 = Net Income
$211,000/100,000 = $2.11/share = EPS

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earnings per share

 

earnings per share

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