Company buying back shares - what's it say?
I think I know a couple of reasons such as to help support their share price, to have a bunch for bonuses to employees. But what might be other reasons, perhaps not too beneficial to other stockholder concerns?
Best Answer
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ChaosNantuko answered 7 months ago …
Buying back shares makes every share the shareholders have more valuable. On the other hand, you should keep in mind that it alters the overall capital structure of the business.
Buying back shares means the company has less cash on hand, which increases their debt:equity ratio, which increases leverage and thus risk. On the other hand, if the company usually has a debt to equity ratio of 40%, and it has fallen to just 20% recently, they may want to go back up to 40% (management may have an ideal ratio in mind, and try to stick to it), and that may be the reason for that.
Worst case scenario, its because the company has too much cash on hand, and doesn't believe the returns on any potential new projects would be worthy of starting them, so instead they "give back" to shareholders via a buyback. Potentially a sign of slowing earnings growth, though not necessarily depending on the industry, and the industries prospects.
In my mind, there is 2 ways to think about it. A) the company is making a bet that their shares are undervalued, B) The company has excess cash, nothing to invest it in, and so is "giving it back" to shareholders (a potential sign of slowing earnings growth), or C) The company is trying to maintain their capital structure (which is necessary for stability)
