What is Treasury Stock?
Treasury stock is the previously-issued common stocks that are re-purchased from the stockholders by the corporation. Treasury stock is found in the company’s balance sheet and represents the difference between the number of shares issued and the number of shares outstanding. Treasury stocks do not receive dividends, and will not have voting rights. Treasury stocks can be sold, retired, or can continue to be held by the corporation as treasury stocks.
Impact of Treasury Stock
An increase in share repurchase by the corporation will affect the balance sheet in two ways. First it decreases the line-item treasury stock, which is part of the stockholder’s equity. Second it decreases cash as part of the asset if the company uses cash to buy back the shares.
Stock repurchase is an important metric for investors as it has several benefits and helps investors understand a company’s stock repurchase plan. Buying a large quantity of stock in the market will lead to an increase in the stock price, thus increasing the company’s equity value. Share repurchase can also help the company consolidate its control over its company. Apart from that, share repurchase can increase EPS (earnings per share), which is an important variable for determining share prices as it represents a company’s profitability. Since EPS is calculated by net income over shares outstanding, a decrease in shares outstanding caused by share repurchase will increase EPS.
