What are Treasury Stocks?

Treasury stock is the term used to describe shares of a company that have been repurchased by the issuing company from the open market. As a result, there are fewer shares outstanding overall on the open market. Treasury stock is still issued, but it’s not taken into account when determining earnings per share (EPS) or when distributing dividends. Companies buy back shares for various reasons, including boosting stock price, increasing ownership control, or having shares available for employee stock options. Treasury stocks are listed as a negative entry in the shareholders’ equity section of the balance sheet. Another name for Treasury stock is reacquired stock or Treasury shares.

Key Highlights

• Treasury stock is stock that the issuing business has repurchased and is holding that was previously outstanding.

• As it lowers the overall shareholders’ equity on a company’s balance sheet, it is referred to as a counter-equity account.

• Treasury stock can be resold to raise capital without issuing new shares.

Understanding Treasury Stocks

Any firm may issue a set number of shares, which we refer to as “outstanding shares.” Some of these shares are traded publicly, while others are restricted shares, which cannot be sold until specific requirements are met.

Treasury stocks are stocks held by an entity (person or organization) that were originally a component of outstanding shares. Nonetheless, the business buys back these shares from its owners.

It is possible to hold Treasury stock for open market selling or to retire it. Shares that have been retired are permanently cancelled and cannot be reissued. After they are retired, they are removed from a company’s financial statements as treasury stock. Treasury shares that are not retired may be reissued as capital raises, stock dividends, or employee pay.

Examples of Treasury Stocks

ABC Tech Solutions Ltd. – Example:

1. Initial Buyback:

•   In 2022, ABC Tech Solutions repurchased 1 million shares at ₹3,750 each, spending ₹3.75 billion.
•    These shares were recorded as treasury stock on the balance sheet.

2. Employee Stock Options:

•    In 2023, ABC used 200,000 treasury shares for employee stock option programs.
•    This reduced the treasury stock count to 800,000 shares.

3. Market Stabilization:

•  During a market downturn in 2024, ABC bought back an additional 500,000 shares at ₹3,000 each.
•  This increased treasury stock to 1.3 million shares.

4. Dividend Reinvestment Plan:

• ABC allowed shareholders to reinvest dividends by purchasing treasury stock at a slight discount.
• This gradually reduced the treasury stock over time.

5. Acquisition Currency:

•   In 2025, ABC used 600,000 treasury shares to acquire a smaller competitor.
•   This transaction reduced treasury stock to 700,000 shares.

By holding these treasury shares, ABC Tech Solutions gained flexibility in managing its capital structure, compensating employees, and pursuing strategic opportunities. The company’s use of treasury stock helped it respond to market conditions and corporate needs without issuing new shares or spending additional cash.

Limitations of Treasury Stocks

• Market conditions: Due to unfavourable market conditions or legal limitations, repurchasing shares on the open market may not always be possible.

• Timing problems: Repurchasing shares could cause errors in the EPS calculation if it coincides with the exercise or conversion of stock options or securities.
• Impact on financial ratios: Holding treasury stock reduces equity and may negatively affect specific financial ratios, like return on equity.

• Limited influence on stock price: Large-scale treasury stock holdings may not significantly impact the company’s stock price or prevent dilution.

How Do Companies Buyback Stocks?

A stock buyback, also known as a repurchase, is a tactic used by the management of a firm to lower the quantity of outstanding shares that are traded on the market. The increase in relative ownership is probably going to be advantageous to the remaining shareholders of the company. The ways in which a business can execute the repurchase are as follows:

Tender Offer

A business proposes to buy back shares from current owners at a price that the business is willing to pay. Usually, this stated price is more than the going rate. Additionally, the term of the buyback offer’s validity is disclosed by the corporation. Shareholders who wish to sell their holdings in the company may tender their shares for repurchase within the deadline once the tender offer is made public.

Open Market Operation

The open market operation, sometimes referred to as direct purchase, consists solely of purchasing shares back straight from the exchange. Every time a business declares a buyback, the move is typically seen favourably, which drives up the share price. The business then makes the purchase of the shares, just like every other market participant.

Dutch Auction

By taking this option, the business declares that it will buy back its shares. Along with the time frame for which the offer is active, the corporation often discloses the price range within which it plans to buy back the shares. A current shareholder may tender their investment within the specified price band if they are prepared to participate. The business buys the required number of shares at the best price after obtaining the interest of every shareholder. This is done by looking at the shareholder’s offer. 

Conclusion

Treasury stock is the cost of shares repurchased by a company. When a company buys back stock, it may later resell it to raise cash, utilise it in an acquisition, or retire the shares. Different people believe that this stock should be carried on the balance sheet at its historical cost or its current market value. Reducing the number of outstanding shares can help with a range of essential purposes, such as avoiding unnecessary business takeovers and enabling other forms of employee remuneration. It is critical for an active investor to understand how the purchase of treasury shares affects key financial numbers and numerous balance sheet line items.

FAQs on Treasury Stocks