What is Treasury Stock?

Treasury stock is shares in a company that the issuer has reacquired. The issuing company may then retire the stock or resell it at a later date. When calculating the number of shares issued and outstanding, which are reported in a company's financial statements, treasury stock is classified as issued, but it is not outstanding. Treasury stock is also not included in the calculation of a company's earnings per share, does not pay a dividend, and does not have a vote at a shareholders' meeting. The amount of cash paid to buy back treasury stock is recorded in a contra equity account that appears in the equity section of the balance sheet.

Advantages of Treasury Stock

There are several advantages to having treasury stock, which are as follows:

Increase the stock price. Companies buy back shares in order to prop up their stock price by creating artificial demand.
Pay cash to investors. A stock buy back is also useful for transferring money to shareholders without using a dividend.
Improve investor relations. Certain investors may demand a stock buyback, if they believe that a company is not properly deploying its available funds.
Eliminate small investors. A stock buyback can be used to eliminate the holdings of smaller investors, so that a public company can reduce the total number of investors and thereby take itself private.

Disadvantages of Treasury Stock

There are several disadvantages associated with treasury stock, which are as follows:

Reduced cash reserves. When a company buys back its own shares, it uses up valuable cash or resources that could have been invested in growth or operations. This can limit the company’s financial flexibility, especially during economic downturns or unexpected expenses.
Potential misinterpretation by investors. Share buybacks can be seen as a signal that the company lacks profitable investment opportunities. Investors might interpret this negatively, thinking the company has peaked or is trying to manipulate earnings per share (EPS).
Decreased equity on the balance sheet. Treasury stock reduces total shareholders’ equity, as it’s recorded as a contra-equity account. This can make the company look less financially healthy and affect key financial ratios.