A company can buy back its own shares. This is done through issuing tenders for the shareholders to sell some of their shares at a premium price to the market price or buying in the open market. A company would have different reasons to buy back its own stocks and it is important for an investor to understand if a company has bought back its shares (Shi, 2015). A shares buyback reduces the number of outstanding shares in the market. This in turn increases the relative ownership of each investor. As an investor, to determine if a company has repurchased any of its own stock, I would look at the balance in the equity section. The number of outstanding shares is listed in this section. Analyzing the outstanding shares for several periods will show if the company has repurchased its own stocks recently. The repurchase of shares will appear in the cash flow as usage of money as well as the dividends paid.

The cash flow statements show the financial activities of the company. It demonstrates whether a company can be able to meet its immediate financial obligations at the moment. Liquidity is the ability to meet the shorter financial obligations while solvency is the ability to meet the long term financial obligations (Shi, 2015). Solvency is important for the survival of the company but liquidity is also important for a company to thrive. I would be looking solvency ratios that are similar with the industry ratios to ensure the company has a good leverage. Low liquidity ratios show that a company will have problems paying creditors and buying new assets which means it will not thrive.

Reference

Shi, S. (2015). Liquidity, assets and business cycles. Journal of Monetary Economics, 70, 116-132.

Response to Iman Shajari 

Hi Iman, great line of thought, I agree that the as an investor, one has access to tons of information found in the financial statements. The annual reports offer a detailed picture of the company’s business, including the risks it faces as well as the operating and financial results for the fiscal year. Analysis of the outstanding shares as listed in the balance sheet in the equity section will show whether a company has repurchased its own shares. However, this will be well represented in cash flow statement as an expense. The financial statements show the liquidity and solvency of a company. Higher liquidity ratios show that a company can be able to meet its immediate financial obligations. Comparing the solvency ratios with the industry average will show how leveraged the company is in the industry.  Solvency ratios show whether a company is in a position to meet its long term financial obligations.

Response to Frederick Olin 

Hi Frederick, great analysis over there, I agree the treasury stock account indicates the number of outstanding shares and one can be able to determine if a company has repurchased its own shares. However, this can also been determined from the cash flow statement where a repurchase of shares will be indicated as an expense. The dividends paid are listed in the dividends payable account and will also appear in the cash flow as an expense. The cash flow statements also indicate the liquidity and solvency of a company.  Solvency is important for the survival of the company but liquidity is also important for a company to thrive. I would be looking solvency ratios that are similar with the industry ratios to ensure the company has a good leverage. Low liquidity ratios show that a company will have problems paying creditors and buying new assets which means it will not thrive.

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