Definition
Treasury Stock (Treasury Shares) refers to the portion of shares that a company keeps in their own treasury. They may have either never been issued to the public or may have been bought back from the public. This stock doesn’t carry voting rights and is not included in the calculation of dividends or earnings per share.
Phonetic
“Treasury Stock” is pronounced as “Trez-uh-ree Stok” and “Treasury Shares” is pronounced as “Trez-uh-ree Shayrs”.
Key Takeaways
- Treasury Stock Definition: Treasury stocks, also known as treasury shares, refer to the shares that a company holds in its own treasury. Often, companies repurchase their own stocks from the open market which then do not form part of the company’s outstanding shares available to the public.
- Implications for a Company’s Finances: Unlike common stock shares, treasury shares do not have any voting rights, nor do they provide dividends. Hence, they do not have any earnings per share implications. However, the process by which companies buy back their own stock can impact the company’s financial structure, often used as a strategy to make use of excess cash, to increase stock liquidity, or to try and manipulate the company’s financial ratios.
- Effect on Shareholder Wealth: Lastly, treasury shares may influence shareholder wealth. For instance, when a company decides to buy back its shares, it can potentially increase the remaining shareholders’ proportion of ownership, earnings per share and voting power. On the downside, if the company overpays for the shares repurchased, it might destroy shareholder value.
Importance
Treasury stock, also known as treasury shares, is crucial in the business/finance realm as it reflects shares that a company has bought back from the open market. Although these shares don’t pay dividends, influence voting rights, or report earnings per share, they grant the company increased control and flexibility over its stock. Companies can employ treasury stock to prevent hostile takeovers, fund employee stock benefit plans, or reissue in mergers and acquisitions. Additionally, treasury stock can bolster a company’s market value by reducing the amount of outstanding shares, thus increasing earnings per share (EPS), a key performance indicator. Therefore, treasury stock plays a significant role in a company’s financial strategy and management.
Explanation
Treasury stock, also known as treasury shares, serve a dynamic role in a corporation’s financial management. Their core purpose is to provide companies with a mechanism to manage, control and potentially leverage their own outstanding shares. By buying back its own shares from the open market, a company can essentially reduce the amount of shares in circulation, which can influence the corporation’s stock price, earnings per share, and voting control, making the remaining shares more valuable.Additionally, treasury stock can be effectively utilized for satisfying various strategic needs of a company. For instance, if a company feels its shares are undervalued, it can purchase its own shares in the marketplace to demonstrate its confidence, which may increase investor interest and drive up the stock price. Furthermore, these shares can be reissued at a later date for raising capital, used for employee incentive programs, or to prevent other companies from taking over the company. Therefore, maintaining treasury stock offers a company more flexibility in managing its financial and strategic goals.
Examples
1. Apple Inc.: In 2012, Apple initiated a significant share repurchase program (a mechanism to create treasury stock) and significantly increased its pace in April 2013. By doing this, they were buying back its own shares from the marketplace, which reduces the amount of outstanding stock in the market. They have hence created a large reserve of treasury stock. The purpose was primarily to return capital to shareholders and offset the dilution of equity caused by employee compensations.2. Exxon Mobil: Exxon has a long history of stock buybacks, which are used not only for returning excess capital to shareholders but also for reducing the dilutive effects of stock compensation. Over time, these buybacks create treasury stock that can be reissued in the future if needed.3. Microsoft: Microsoft has had share repurchase programs in place for many years, which allow the company to buy back its own shares, creating treasury stock. The intention is often to reinvest this capital back into the business, or to prepare for possible acquisitions.
Frequently Asked Questions(FAQ)
What is Treasury Stock (Treasury Shares)?
Treasury Stock, also known as Treasury Shares, refers to the shares that a company has bought back from its shareholders. These stocks are no longer in circulation, are not outstanding, but are still counted as issued shares.
Why would a company buy back its shares?
There are several reasons. A company might buy back shares to reduce the number of shares in the market and increase the value of remaining shares, to prevent other companies from taking over, or simply to invest in itself.
How is Treasury Stock represented on the balance sheet?
Treasury Stock is listed under shareholder’s equity on the balance sheet as a negative or deduction. It is represented as a contra account, which means it’s used to reduce the value of a related account.
Does Treasury Stock pay dividends?
No, Treasury Stock does not pay dividends. These stocks represent shares that a company has reacquired and they don’t have voting rights or pay dividends.
Is treasury stock an asset?
No, treasury stock is not considered an asset. It is accounted for as a deduction from the total value of issued shares.
Can Treasury Stock be sold?
Yes, a company can decide to resell its Treasury Stock to raise cash or for other strategic reasons. However, the resale value might be more or less than what the company originally paid.
How does the purchase of Treasury Stock affect the company’s cash flow?
Purchase of Treasury Stock is considered a financing activity, and it results in a cash outflow. Therefore, it decreases the company’s cash flow.
What are the benefits of Treasury Stock to shareholders?
If a company buys back its own shares it can result in an increased Earnings Per Share (EPS), and potential stock price appreciation, which can be beneficial to the remaining shareholders.
What are the disadvantages of Treasury Stock?
One of the main disadvantages of Treasury Stock is that the money spent on buying back shares could have been used for other investments or for business growth. Besides, it is a cash outflow activity that can impact the company’s cash reserves.
: Is Treasury Stock recorded at par value or cost?
: In the US, according to the Generally Accepted Accounting Principles (GAAP), Treasury Stock is recorded at cost, not par value. It is recorded at the price the company paid to acquire the shares from the market.
Related Finance Terms
- Buyback of Shares
- Outstanding Shares
- Stock Repurchase
- Equity Reduction
- Earnings Per Share (EPS)
Sources for More Information
