What is a 'Treasury Stock (Treasury Shares)'
Treasury stock (treasury shares) are the portion of shares that a company keeps in its own treasury. Treasury stock may have come from a repurchase or buyback from shareholders, or it may have never been issued to the public in the first place. These shares don't pay dividends, have no voting rights and should not be included in shares outstanding calculations.
BREAKING DOWN 'Treasury Stock (Treasury Shares)'Treasury stock is often created when shares of a company are initially issued. In this case, not all shares are issued to the public, as some are kept in the company's treasury to be used to create extra cash if it is needed. Another reason may be to keep a controlling interest within the treasury to help ward off hostile takeovers.
Alternatively, treasury stock can be created when a company does a share buyback and purchases its shares on the open market. This can be advantageous to shareholders; it lowers the number of shares outstanding, thereby increasing the remaining shareholders' equity interest in the company. However, not all buybacks are a good thing. For example, if a company merely buys stock to improve financial ratios such as earnings per share (EPS) or the price-to-earnings (P/E) ratio, then the buyback is detrimental to the shareholders, and it is done without the shareholders' best interests in mind.
Treasury Shares vs. Retired Shares
Although the company has repurchased its shares, those shares are not necessarily retired. Retired shares cannot be reissued and are taken out of circulation. Treasury shares, however, can be reissued through stock dividends, employee compensation or a capital raising, for example.
Treasury Shares' Effect on the Balance Sheet
When a company raises cash by issuing stock, the equity portion of the balance sheet shows a positive balance in the common stock and additional paid in capital (APIC) accounts. The common stock account reflects the par value of the shares, while the APIC account shows the excess value received over the par value.
When treasury shares are repurchased by the company, however, they are carried on the balance sheet as a contra-equity account with a negative balance in the equity section. Moreover, they are carried at cost in one account as opposed to two accounts with a par value and excess value over par.
Example of Treasury Shares
A company has excess cash and believes its stock is trading under its intrinsic value, so it decides to repurchase 1,000 shares of its stock at $50 for a total value of $50,000. The total sum of its equity accounts including common stock, APIC and retained earnings is $100,000. After the repurchase, the $50,000 in treasury stock is carried as a negative equity account and subtracted from the $100,000 in equity beforehand, leaving the total equity amount on the balance sheet at $50,000. Correspondingly, the cash account on the asset side of balance sheet decreases by $50,000.