BUYBACK

A Company’s offer to purchase it’s own shares issued earlier is termed as buyback. It usually does
not affect the company’s operation or it’s stability. It’s objective is to reduce the company’s share
capital as typically these shares are extinguished.
TYPES OF BUY BACK :
A company buys back its shares by sending a letter of offer to shareholders. It fixes a price, generally
higher than the prevailing market price. Companies can also fix a range of prices in which it is willing
to buy the shares.
Companies also buy shares in the open market through brokers.
HOW TO EVALUATE A BUY BACK :
Theoretically a company goes for buyback when it has surplus cash and few investment
opportunities. In such a situation, companies reward their shareholders by offering them cash for
the shares. However in a developing economy like India, which has many investment opportunities
there are very few companies that can give this reason for buy back.
Investors should be aware of any manipulation or inaccurate information that a company may give
to explain why it opted for buyback.
A buy back reduces the number of shares in the market and thus the EPS increases. As a result the
price earning multiple (PE) falls and the valuations becomes attractive, which leads to more demand
for the stock pushing prices up. At times the management uses this to put a gloss to their financial
statements. Investors should note that the prices cannot be sustained until the profitability of the
company improves.