Translation: Treasury Shares = treasury shares (also known as reacquired shares or repurchased company shares).

Simple definition: This is a financial and accounting term referring to shares that the company previously issued and that were traded in the market, but that the company itself later repurchased from shareholders and retained in its “treasury.” In short, the company is investing in itself; these repurchased shares lose some of their customary rights (such as the right to vote at general meetings or receive dividends) as long as they remain in the company’s possession. The company may later either cancel them (to reduce the number of shares in the market), resell them, or use them for other purposes, such as employee incentive programs.

How does it work?: When management decides that it has excess cash and believes its market share price is attractive, or when it needs shares for a specific purpose (such as employee compensation), it seeks the approval of the “Extraordinary General Assembly.” After approval, the company purchases its shares on the open market (through a trading platform) over a specified period. From an accounting perspective, these shares are not recorded as investment assets; rather, they are recorded as a contra account (as a negative amount) that is deducted from total “shareholders’ equity” on the balance sheet.

Practical example: Suppose that Tawuniya Insurance decided to reward and retain its top talent through an “Employee Incentive Shares” program. To provide these shares without resorting to issuing new shares (which could reduce existing shareholders’ ownership stakes), it obtained approval from its General Assembly. The company entered the market and purchased 212,143 of its own shares at an average price of SAR 139.35 per share, for a total value of approximately SAR 29.5 million. These shares are now “treasury shares”; Tawuniya temporarily holds them on its books to implement the incentive program. During the period in which the company holds them, these shares receive no dividends and have no voting rights.

What does this mean for you as an investor reading the financial statements?

  • Share-price support (a confidence signal): When a company buys back its own shares, it sends the market a message that management has confidence in the company’s strength and future and believes the shares are trading at an attractive price. This additional demand from the company reduces the supply available in the market and may help support the share price.
  • Increased earnings per share (EPS): When a company holds “treasury shares,” they are excluded from the total number of “shares outstanding.” Consequently, when the company reports its net income, that income is divided among fewer shares. The result? Higher earnings per share, making the stock appear more attractive to new investors.
  • Use of cash liquidity: This item reminds you that the company used some of its liquid funds to purchase these shares instead of investing them in new expansion projects or distributing them directly to shareholders as cash dividends. As an investor, you should assess whether this is the optimal use of the company’s funds.

Frequently asked question: Is a company’s purchase of its own shares (the creation of treasury shares) always considered positive news and an indicator of success?

Answer: Generally, yes. It is viewed as a positive action because it reflects management’s confidence and improves returns on the remaining shares. However, this is not the case in every situation. Sometimes companies buy back shares to offset “dilution” resulting from granting shares to employees (as in Tawuniya’s case, where the objective is administrative and organizational rather than necessarily a permanent reduction in the number of shares). In other cases, management may buy shares at excessively high prices, which constitutes a misuse of liquidity that would have been better invested in growing the company’s business. Therefore, the key considerations are always the purpose of the purchase, its timing, and the price paid.