Treasury stock (Or Treasury Shares or Repurchased Shares) are shares in the company that the company has bought back and retaining on the company’s balance sheet.
Treasury stock is found as a negative number on the company’s balance sheet and statement of shareholder equity.
Shown below is Coca-Cola’s balance sheet from the 3rd quarter 2013 10-Q filing.
(click to enlarge)
Companies can buy back their shares for a number of reasons; if they have excess cash they want to put to use, if they want to retain shares to fulfill employee stock options, in order to prevent dilution of the current shares due to any employee stock compensation plans or just because management feels they are undervalued.
When a company buys back and retains its stock on the balance sheet as treasury stock it may reissue the shares at a later date. But until the shares are reissued or cancelled altogether, they receive no dividends, have no voting rights and lower the number of shares outstanding, which raises any per share calculations such as EPS (Earnings Per Share).
Because of this many investors are happy to see large amounts of Treasury Stock on a company’s balance sheet. Warren Buffett is notorious for investing in companies that continually repurchase their own shares. Buffett views the ability to consistently have the money to repurchase their own stock as a sign of a competitive advantage and a sign that future earnings will continue to be strong.
When a company repurchases its own shares, it is recorded on the company’s balance sheet as a decrease in shareholder equity, as you can see above where Coca-Cola has recorded -$38,238.
For this reason, it may prove significant to add back the negative treasury stock number for analysis using shareholder equity (such as return on equity, or any debt/asset to equity ratios).
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