Treasury Stock

What is Treasury Stock?

Treasury stock meaning is the process when a company has bought back shares from its stockholders to reduce the number available on the open market.

These shares will be held in its own treasury and aren’t available for investors to buy. They also differ from other shares as they don’t pay dividends or have ownership rights.

Purpose of Treasury Stock

Anyone interested in what treasury stock is will want to know the purpose of holding such an item within the company’s finances. The aim of treasury stock is to give companies more control over outside ownership, as well as raise capital when it’s required.

These are some of the key reasons for reacquiring stock:

How to Calculate Treasury Stock

A company can calculate how much treasury stock it will end up with after it repurchases shares by multiplying the number of shares it wants to buy by their current cost.

In addition, there’s a term referred to as the treasury stock method. This is used to calculate the net increase in outstanding shares if options are warrants were to be exercised.

Treasury Stock Example

The best way to have treasury stock explained is through an example. Let’s look at a fictional example of how treasury stock may be calculated.

Treasury Stocks and Balance Sheets

Treasury stock is one of several equity accounts that appear on a company’s balance sheet. It can usually be found under the heading: stockholders’ equity.

We’ll now explore these different equity accounts and how treasury stock fits into the picture when it comes to a company’s finances.

Difference Between Treasury Stock and Other Equity Accounts

There are often several types of equity accounts listed on a company’s balance sheet, each of which has a different meaning.

For example, these will include common stock, preferred stock, additional paid-in capital, retained earnings, and treasury stock.

However, treasury stock is classified as being a contra-equity account. This means it’s an account that’s kept at either a negative or zero balance.

In the case of treasury stock, it’s the balance of all stock repurchased by a company. This means it reduces shareholders’ equity by the amount paid for the reacquisition. This is important to know when you’re exploring the various methods of accounting for treasury stock.

So, where do treasury stocks fit in with a company’s broader shareholding?

Let’s take the treasury stock example from the balance sheet of Alibaba, the Chinese multinational technology company.

How Do Companies Perform a Buyback of Stocks?

A company will carry out a buyback of its shares in order to reduce the number circulating in the wider market that may be bought by investors.

Two of the main ways to carry this out are by tender offer and open market.

Why Do Companies Buy Back Outstanding Shares?

So, why are share buybacks important? What is it about this process that companies find attractive? Why do they pursue this course of action?

There are several reasons why a company may opt to buy back its own shares:

Limitations of Treasury Stock

It’s important to recognize there are limits to treasury shares. These may change depending on where in the world the company is registered.

• No voting rights.
• Not included in the calculation of outstanding shares.
• Not entitled to receive dividends.
• Not allowed to receive net assets in case the company goes into liquidation.

The Bottom Line

The clearest treasury stock definition is that it’s the process when a company buys back its shares from existing stockholders to take them out of circulation.

Companies may opt to go down this route for a variety of reasons. For example, they may be looking at how to fund future investments or want to retire the stock completely.

In some cases, a business may have a lot of cash on its balance sheet, without any clear idea of what to do with the money.

The treasury stock will be recorded on the company’s balance sheet and is normally found in the shareholders’ equity section.

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