Definition
Treasury Stock, also known as Treasury Shares, refers to the portion of shares that a company keeps in its own treasury. These are originally issued shares that were either repurchased or never sold to the public. Treasury stocks are considered issued but not outstanding and do not pay dividends nor have voting rights.
Key Takeaways
- Treasury Stock or Treasury Shares refer to the portion of shares that a company keeps in its own treasury. These are essentially the company’s own shares, which it has bought back from the outside market but has not retired.
- These shares do not have any voting rights and the company does not receive any dividends from them. They are also not factored into earnings per share (EPS) calculations, reducing the total amount of shares participating in dividends and net income.
- Treasury Stocks can be reissued, retired or cancelled. They provide the company with a flexibility to control its overall market share and help manage stock prices. Companies often use this strategy to prevent other firms from taking them over or to show confidence in the company’s future growth prospects.
Importance
Treasury Stock or Treasury Shares is an important finance term because it represents the portion of shares that a company keeps in their treasury and has not issued to the public. These stocks are important for several reasons.
Firstly, they give the company the flexibility to control its stock supply in the market, which allows for manipulation of its earnings per share and market price, subsequently influencing investor perception. Secondly, Treasury Stock can be used by the company for corporate purposes such as employee stock options or bonuses, mergers and acquisitions, or even to prevent hostile takeovers.
However, these stocks do not carry voting rights or pay dividends. Therefore, treasury shares play a key role in controlling financial management and corporate strategies.
Explanation
Treasury stock or treasury shares are the portion of shares that a company keeps in its own treasury. They may have either never been issued to the public or may have been repurchased from the public.
The primary purpose of holding treasury stock is to improve financial metrics and increase the company’s control over its own stock. Companies may do this to prevent hostile takeovers or to retain voting rights.
Holding on to these shares provides corporations with the flexibility to manage their equity structure. Being in possession of such shares, a company can decide to reissue the stock to potential investors, increasing the company’s market liquidity, making it more attractive to prospective shareholders.
Additionally, treasury stocks can be utilized to reward employees through bonus shares or stock options, developing a sense of ownership and motivation amongst employees. Smoothening out of financial ratios and provision of shares for Employee Stock Ownership Plans (ESOP) are also common uses of treasury stock.
Examples of Treasury Stock (Treasury Shares)
Apple Inc.: In 2012, Apple initiated a share buyback program as part of a capital return plan to its shareholders. The repurchased shares by Apple are held as treasury stock. Over the years, Apple has continued this practice, resulting in a significant number of treasury stock.
Microsoft Corporation: Microsoft has also been known to buy back its own shares. At the end of fiscal year 2019, Microsoft’s treasury shares had a value of $
8 billion, indicating a significant repurchase over the years. The shares remain as treasury stock until the company decides to either retire or reissue them.
Cisco Systems: The company has participated in share repurchase plans since 2001 and as of 2021, they have repurchased and retired
3 billion shares. These repurchased shares are typically recorded as Treasury Stock on a firm’s balance sheet. Cisco retains the option to re-sell these shares back into the market should they wish. Note: keep in mind that treasury stock refers to the portion of shares that a company keeps in their own treasury. These shares don’t pay dividends, have no voting rights, and should not be included in shares outstanding calculations.
FAQs on Treasury Stock (Treasury Shares)
What is Treasury Stock (Treasury Shares)?
Treasury Stock, also known as Treasury Shares, refers to the portion of shares that a company keeps in its own treasury. They may have either never been issued to the public or may have been repurchased by the company. Unlike common shares, treasury shares do not pay dividends, have no voting rights, and should not be included in shares outstanding calculations.
Why would a company buy back its own shares?
A company might buy back its shares for a variety of reasons. This may include to return surplus cash to shareholders, to increase the company’s share price, to fight off a takeover bid, or to make use of the shares for employee incentive plans.
What is the difference between treasury stock and outstanding stock?
Outstanding stock refers to the total shares issued by a corporation, including those owned by the general public, institutional investors, and the company’s officers. Treasury shares, on the other hand, are any shares that a company has repurchased and are therefore not included in the outstanding shares total.
How does a company’s treasury stock influence its financial statements?
Treasury shares are deducted from a company’s share equity on its balance sheet, leading to a decrease in total shareholders’ equity. This is because they effectively represent negative equity. They also contribute to the company’s cash outflows under the financing activities in the cash flow statement when purchased.
Can treasury stocks be reissued?
Yes, treasury stocks can be reissued by selling them off, either on the open market or as part of an employee compensation program. Once reissued, these shares regain their voting rights and ability to receive dividends, and are once again considered part of the company’s outstanding shares.
Related Entrepreneurship Terms
- Buyback Shares
- Outstanding Shares
- Retired Shares
- Share Repurchase
- Equity Reduction
Sources for More Information
- Investopedia: A comprehensive website that provides a wealth of information on various finance and investing terms and concepts, including Treasury Stock.
- Corporate Finance Institute (CFI): A professional training and certification provider offering in-depth articles and training resources on various finance topics, including Treasury Stock.
- AccountingTools: A resource providing clear explanations of accounting and financial terms and concepts, including Treasury Stock.
- Khan Academy: A non-profit educational organization offering free video lessons on a multitude of subjects, including finance and capital markets.
