A share buyback or share repurchase occurs when a business purchases its own shares and then either cancels them or holds them in treasury for re-issue at a later date.

Share buybacks are good when the company’s management perceives that their shares may have been undervalued. Share buybacks also instill confidence among investors as it is seen as boosting share value and is a good signal for shareholders.

A share repurchase is a transaction whereby a company buys back its own shares from the marketplace. A company might buy back its shares because management considers them undervalued. The company buys shares directly from the market or offers its shareholders the option of tendering their shares directly to the company at a fixed price.

Also known as a share buyback, this action reduces the number of outstanding shares, which increases both the demand for the shares and the price.

Because a share repurchase reduces the number of shares outstanding, it increases earnings per share (EPS). A higher EPS elevates the market value of the remaining shares. After repurchase, the shares are canceled or held as treasury shares, so they are no longer held publicly and are not outstanding.

A share repurchase impacts a company’s financial statements in various ways. A share repurchase reduces a company’s available cash, which is then reflected on the balance sheet as a reduction by the amount the company spent in the buyback.

At the same time, the share repurchase reduces shareholders’ equity by the same amount on the liabilities side of the balance sheet. Investors interested in finding out how much a company has spent on share repurchases can find the information in their quarterly earnings reports.

A share repurchase reduces the total assets of the business so that its return on assets, return on equity, and other metrics improve when compared to not repurchasing shares. Reducing the number of shares means earnings per share (EPS), revenue, and cash flow grow more quickly.

If the business pays out the same amount of total money to shareholders annually in dividends and the total number of shares decreases, each shareholder receives a larger annual dividend. If the corporation grows its earnings and its total dividend payout, decreasing the total number of shares further increases the dividend growth. Shareholders expect a corporation paying regular dividends will continue doing so.

Share repurchases fill the gap between excess capital and dividends so that the business returns more to shareholders without locking into a pattern.