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Buying Back Stock

Definition:

When a company buys back their shares from the marketplace it is called buying back stock, or share repurchase. A couple of reasons companies buy back stock is they believe their stock is trading below the value they think it is worth, or they want to decrease the number of shares outstanding which decreases the dilution to the shareholders and increases earnings per share.

Example:

When a company buys back its own stock, this cash expenditure appears in the Financing category on the Cash Flow Statement. Amounts shown in thousands (000).

Cash Flow Statement Financing Section

Book Excerpt:

(Excerpts from Financial Intelligence, Chapter 17 – The Language of Cash Flow)

If a company has extra cash and believes that its stock is trading at a price that is lower than it ought to be, it may buy back some of its shares. The effect is to decrease the number of shares outstanding and hence to increase the possibility that the price will rise.

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