Using free cash flow to Equity
Shareholders are the owners of the company in their own proportion. The cash reserve, as Raghu mentioned definitely belongs to them. The promoters/majority stakeholders after taking approval from the board can use this cash in 3 ways.
- Reinvest this money back in the business like buying new company or New asset. Thus helping shareholders to get more money in long term due to better ROI from investments.
- Give this cash back to investors in the form of dividend thus giving their money back to them now itself.
- Buyback some of the shares. When you buyback shares the value of shares increased because, because value of company remains same but the number of shares decrease. Practically for a shareholder dividend receipt and share buyback will have same effect. But for company their debt to equity ratio will be more. More over they can command better control in the company because of lesser shareholders.
Therefore it is not simple decision for company. But for small shareholder it hardly matters. Because the amount of compensation in dividend (immediate cash) or sharebuy back (value of share will increase by same amount) both are are practically same.
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