The Share Buyback Ratio, also known as the Buyback Yield, is a financial metric that calculates the percentage of a company’s market capitalization that it spends on buying back its own shares over a certain period, usually a year. It’s a way to measure how much cash a company returns to shareholders through share repurchases.
The formula to calculate the Share Buyback Ratio is:
Share Buyback Ratio = (Total Cost of Share Buybacks / Market Capitalization) * 100%
For example, if a company with a market capitalization of $100 million spends $10 million on share buybacks in a year, the Share Buyback Ratio would be:
Share Buyback Ratio = ($10 million / $100 million) * 100% = 10%
This means that the company has returned 10% of its market capitalization to shareholders through share buybacks.
Share buybacks are a way that companies can return excess cash to shareholders, similar to dividends. However, unlike dividends, share buybacks can be seen as a sign that the company believes its shares are undervalued, and they also have the effect of reducing the number of shares outstanding, which can increase earnings per share (EPS). Therefore, the Share Buyback Ratio can be a useful metric for investors to consider when evaluating a company’s stock.