Share buybacks or repurchases can be a boost to corporate 澳洲幸运5官方开奖结果体彩网:earnings per share (EPS) but they can also be a drag on 澳洲幸运5官方开奖结果体彩网:book value growth. Many investors use the 澳洲幸运5官方开奖结果体彩网:price-to-book (P/B) ratio to find undervalued stocks and they can run into valuation problems when companies 🌳carry out buybacks. Companies that regularly reduce their share count through repurchases may appear overv🌊alued on a book value basis.

Buybacks have a favorable result for EPS growth but they typically lower the 澳洲幸运5官方开奖结果体彩网:book value per share (BVPS) and slow the growth of this asse🐬t-based measure.

What Does a Buyback Look Like?

Book value is an accounting valuation that's defined as a company's total assets minus total liabilities or debt. Book value per share is the total book value divided by the number of 澳洲幸运5官方开奖结果体彩网:shares outstanding.

The price-to-book (P/B) ratio compares a firm's 澳洲幸运5官方开奖结果体彩网:market capitalization to its book value. A company's market price in the stock market will often greatly exceed its bookꦇ value because a company's stock is worth more than just the value of its assets. Companies have brand value, human capital in their employees, intellectual property, and other intangibles that are often worth more 𝔉than the company's physical assets.

A low P/B is therefore a signal to 澳洲幸运5官方开奖结果体彩网:value investors that a♋ company's shares may be undervalued because they don't fully account for those other things. P/B can be gamed by a company's manage✅rs using buybacks, however.

Let's look at an example of how buybacks affect the earnings per share and book value per share of a super-sized corporation doing a large one-time buyback.

XYZ Corporation: Pre-Buyback

1. Total assets $300 billion - Total liabilities $150 billion
   Book value = $150 billion
2. Book value $150 billion / Shares outstanding 1 billion
   Book value per share = $150
3. Annual earnings $20 billion / Shares outstanding 1 billion
   Earnings per share = $20
4. EPS $20 / Book value $150 per share
   澳洲幸运5官方开奖结果体彩网:Return on equity = 13.3%

Assume XYZ's stock is trading at $200 per share and XYZ buys back half of all its shares, 500 million in all or a total of $100 billion in shares. This would take place over several years at various prices in the real world, but let's assume for illustration purposes that it all happens at once.

XYZ Corporation: Post-Buyback

$100 billion of cash assets was spe♏nt to buy 500 million shares at👍 $200 per share:

1. Total assets $200 billion - Total liabilities $150 billion
   Book value = $50 billion
2. Book value $50 billion / Shares post-buyback 500 million
   Book value per share = $100 per share
3. Annual earnings $20 billion / Shares post-buyback 500 million
   Earnings per share = $40 per share
4. EPS $40 per share / Book value $100 per share
   Return on equity = 40%

It lowers the🧸 book value per share when the shares are repurchased above the current book value per share. The company could have raised its book value per share through a buyback if the stock was trading below book value but this is rare.

A buyback could show up on a corporate 澳洲幸运5官方开奖结果体彩网:balance sheet in several ways depending on several factors but we'llﷺ asꦯsume that XYZ repurchased the shares with cash on hand to keep it simple. XYZ then retired the shares as though they had burned the shares, never to be issued again. This results in a decrease in cash assets and therefore a decrease in shareholders' equity on the balance sheet. There's no corresponding gain in other assets.

How Should You Interpret Buyback Results?

There's a major distortion of book value per share due to a major share repurchase done above the current book value per share number.

Buybacks improved the EPS from $20 to $40 but they lowered book value per share from $150 to $100. The return on equity (ROE) measurement goes from a rather normal 13.3% to an astounding 40%. ROE numbers can൲ make a normal business look extraordinarily good but they should be viewed as an accounting abnormality when a ꧒major buyback occurs.

Despite criticism, share buybacks by U.S. corporations have been increasing over the past decade.

The Bottom Line

Be careful if a company has been buying back stock if you use the price-to-book ratio as a measure of value. How can you tell if this has happened? Look at the company's total share count over successive years.

The best solution for an investor is to look at growth in EPS and ROE as well as price-to-book value, in🔯 the light of any artificial effects from buybacks.

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