What it means
When a company buys back its own shares from the open market, those shares become treasury shares. This is a common strategy used by businesses when they have excess cash and believe their stock is undervalued.
By reducing the number of shares available to the public, the company concentrates ownership among the remaining shareholders. This often boosts key financial metrics like earnings per share, because the same total earnings are now divided among fewer active shares.
Keeping shares in the treasury also gives a company flexibility for future needs. Instead of issuing brand new shares, which dilutes the ownership percentage of current investors, the company can reissue treasury shares to fund employee stock option plans, reward key executives, or even help pay for the acquisition of another business.
It acts as a reserve of corporate currency. It is important to remember that treasury shares carry no voting rights and do not receive dividends.
On the balance sheet, the total amount spent to buy back these shares is recorded as a negative value, known as a contra-equity account, which reduces total shareholders' equity. While buybacks can signal confidence to the market, they also mean the business has permanently spent cash that it could have otherwise invested in growth projects, research, or debt reduction.
In practice
Real-world examples.
Example
Techstart Ltd buys back 10,000 of its own shares from the stock exchange for 50,000 pounds. These shares move into the company treasury, reducing the total public float and boosting future earnings per share.
Example
Baker Street Bakery purchases 500 shares from a retiring founder for 5,000 pounds. The private company holds these in reserve to offer as a performance incentive to its new head pastry chef next year.
Example
Global Logistics PLC holds one million treasury shares worth 5 million pounds, which it later uses as part-payment to acquire a smaller regional freight competitor without needing to borrow extra bank cash.
Think of it
“Imagine a theater company that prints 100 tickets for a show. If they buy back 10 of those tickets at the door, they now hold 10 empty seats. They can hand those seats out later to special guests, or keep them empty so the remaining audience has more legroom.
Formula
Calculation
Treasury Shares = Total Issued Shares - Shares Outstanding (held by the public). For example, if a firm originally issues 1,000,000 shares and buys back 150,000, it has 850,000 shares outstanding and 150,000 treasury shares.Case study
Seen in the real world.
Consider Apex Dynamics, a mid-sized software firm with 2,000,000 shares outstanding trading at 10 pounds each. The board notices the company has generated strong surplus cash of 1 million pounds and decides the share price is lower than it should be. Apex uses the cash to buy back 100,000 shares, placing them into the treasury. This reduces total outstanding shares to 1,900,000.
At the end of the financial year, Apex reports a net profit of 3.8 million pounds. Previously, earnings per share would have been 1.90 pounds (3.8 million divided by 2 million shares). Because of the buyback, the earnings per share rises to exactly 2.00 pounds (3.8 million divided by 1.9 million shares). This improvement makes the company look more profitable on a per-share basis, which often helps support the market share price. Later, Apex takes 20,000 of those treasury shares to reward its top software engineers through a bonus scheme, avoiding the need to print brand new shares and dilute existing investors.
Watch out
Common mistakes.
- Thinking that treasury shares still receive company dividends and hold voting rights.
- Confusing treasury shares with unissued shares that have never been sold to the public.
- Believing that buying back shares creates new company assets or physical wealth.
Questions
People also ask.
Do treasury shares count towards market capitalization?
No. Market capitalization is calculated using only the shares outstanding in the hands of the public, excluding treasury shares.
Can a company sell treasury shares back to the public later?
Yes. A company can reissue treasury shares to raise fresh cash if market conditions are favourable.
Are treasury shares considered an asset on the balance sheet?
No. They are treated as a contra-equity item, which means they reduce the overall shareholders' equity value.
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