Question

Home Depot has been buying back a lot of it's stock.. Please explain why and do you think this is a good move by Home Depot?

Answer 1

Basic explanation about buy back :- Share repurchase or buy back of own shares in simple language means company is reducing its liability by paying back its shareholders. there can be multiple reasons why a company buys back its stock and also stock buy back may affect a company's financial position in either ways i.e positively or negatively.

There can be following reasons and situations for buy back:-

1. Company is generating excessive cash and returns and it wants to utilize that cash by paying off shareholder's money so that it can invest its maximum profit in business rather than paying it as dividend.

2. When company feels its stock is under valued due to external factors and its the best time to reduce its liabiity by buying back

3. To improve ratios such as Return on capital employed (As capital employed will reduce, % of return will increase) price earning ratio , earning per share ratio or debt equity ratio etc.

In the given case of home depot, as the reports suggests home depot is doing very good on operational front and its year on year growth is more than expected and hence its having sufficient funds to support its buy back and also after buy back it aims to grow its business by store expansion.

Further, as per the financials of home depot the reason of buy back seems fair and in a good faith and thus it is good move for home depot, it will strenghten its financial position and expediate its growth.

Thank You !!