Public companies aren’t necessarily in the business of timing the stock market, but occasionally they make a good call. A company sometimes buys back outstanding shares of stock from investors when it believes its stock price is too low or for various other reasons. These shares are called treasury stock. If the company later sells its treasury stock for more than its cost, it adds some extra money to its coffers and increases value for shareholders.
Impact on Cash
When a company resells its treasury stock, it pockets the difference between the initial purchase price and the subsequent sales price. This amount boosts its cash account on the balance sheet. For example, assume a company buys back 10 million shares for $10 a share and later sells them for $15 a share. Its cash account would swell by $50 million, or $150 million in sales proceeds minus the $100 million cost.
Impact on Stockholders’ Equity
The treasury stock sales transaction has the same effect on the company’s total stockholders’ equity on the balance sheet: Stockholders’ equity rises by the difference between the sales proceeds and purchase amount. This benefits all stockholders because stockholders’ equity represents the accounting value of the aggregate stake of all stockholders in the company. Using the previous example, the company’s stockholders’ equity would rise by the same $50 million.
Effect on Income Statement
Although it seems like the company made a “profit” on its treasury stock transaction, it’s not technically a profit or gain in the accounting sense. Profits and gains relate to transactions in a company’s operations and investments in other companies. When a company buys and sells treasury stock, it essentially buys and sells a piece of itself. The deal therefore has no impact on its profit on the income statement. In the previous example, the $50 million made on the deal won’t show up on the income statement.
Considerations
Although the accounting value of stockholders’ equity increases when a company sells treasury stock at a higher price, each shareholder’s percentage ownership in the company decreases. This occurs because the treasury shares that were sold increase the number of common shares outstanding. How and if this impacts the company’s stock price depends on various factors, such as the company’s overall share repurchase plan and how much money the company made on the particular deal.