Share Buyback (回购股份)
First, we should understand what is share buyback, and what the pros and cons for doing it. Share buyback happens when the company itself decided to buyback its company shares. This will lead to a decreasing share outstanding, where the shares issued to public will be slightly lesser.
The benefits of buying back the shares is to decrease the share outstanding, making supply lesser than demand, causing retail investors willing to buy the shares at a higher price, hence pushing the share price up. Besides, when the management decided to buyback the company shares, this mainly happened when the management sees that the current share price is still undervalued, hence buying back the shares only brings benefits, but not any risks.
Furthermore, since share outstanding has been decreased, it will also increase Earnings per share (EPS) even if the company is earning the same profit as last quarter. Since EPS is increased, subsequently the PE ratio will also drop, causing the share price to be cheaper and more reasonable. In short, it will attract more investors to buy the company shares at a discounted price.
On the other hand, the disadvantage of having to buyback the company shares may cause investors to worry about the company’s future. This is because the company is currently using their company cash to buyback the shares, investors might think that maybe the company has decided to not expand their business further, and stop growing. Besides, investors might also be worry about the economy, that if the economy take a sharp turn downwards, the company may end up in an awkward situation where it has limited cash to work their way out.
In short, we can see that share buyback has significantly more pros than cons, but that does not eliminate the probability of the management buyback the shares with ill intention. Hence, investors need to do more research in order to show that the company’s decision is correct and may potentially bring more benefit to shareholders.
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