Share Repo

Sorry- I know this isn’t an ambiguous concept but-

If a firm uses part of its earnings to repurchase shares, what would be the effect on the financial statements & in particular ROE?

My understanding: Repurchasing shares would lower equity, but since the cash comes from earnings there is no net effect on equity. The numerator of ROE is net income, but again that is unchanged as a repo is a use of cash, NI wouldn’t be effected.

I thought I came across a Q though that indicated a share repo would effect ROE in the current period.

Similarly, I seem to recall from level 1 that ROE could be improved or worsened depending on the market price vs some other factor?

Sorry to be real vague I’m really just trying to get a sense of what happens to the balance sheet after a buy back.

When the company pays cash for the shares, assets are reduced. Liabilities aren’t affected, so equity has to be reduced by the amount of the purchase.

ROE will increase.


You’re welcome.