https://sg.finance.yahoo.com/news/october-buybacks-60m-seven-stocks-060313368.html
Generally speaking, stock buybacks will boost up the stock prices but the corporate actions will also increase the leverage ratio which is not good.
Why?
If we look at the balance sheet format whereby Assets (A) = Liabilities (L) + Owner's Equities (OE), doing stock buybacks will reduce the A because money is used to buy back the shares. Consequently, OE will reduce simultaneously because the stock capital is shrunk. Since the leverage ratio (LR) is equal to L divided by OE and add 1, the leverage ratio will increase because the denominator (OE) is getting smaller.
LR = (L/OE) + 1
Having a high leverage ratio is dangerous for a company because LR is a multiplier. It can increase a company's profit or loss exponentially. A high LR means that the company is a risk-taker and it is extremely risky in an interest rate rising environment.
Therefore, improving a company stock price through corporate action like stock buyback is not as good as improving the profitability of the business.
We need to take note when a company does a buyback because it may be a precursor that the company cannot improve its profitability anymore and has to resort to corporate action.
Subscribe to:
Post Comments (Atom)
.jpg)
1 comment:
When is the best time to do stock buyback?
Generally speaking, stock buybuck should be done in a low-interest rate environment because it shows that your company is making good use of cheap money but not in an interest rate rising environment.
We're in an interest rate rising environment now!
Post a Comment