Firms with excess cash may opt to return it to shareholders by offering to buy back existing shares in the open market.

This has several benefits for the firm including the fact that by reducing the number of shares in issue a firm boosts the price of the remaining ones. A buyback also boosts earnings per share even on static earnings. Let’s say a firm makes earnings of £20m on outstanding shares of 100m; EPS is 20p (£20m/100m). If a buyback reduces the number of shares outstanding by say 20m then EPS becomes £20m/80m, or 25p. Yet earnings have not changed.

READ MORE