When one is analyzing larger companies, one thing to check for is whether a company is borrowing money at the same time it’s buying back company stock, either to hold as treasury shares or to retire shares. While the balance sheet will reveal the net change in debt and common stock from period (quarter) to period, it does not break the change down sufficiently for someone to understand exactly what transpired during the quarter to explain the change.

This is where the Statement of Cash Flows comes in. It explains all changes in balance sheet accounts from period to period in terms of impact to company cash.

You can go to the “cash flow from financing activities” section of the Statement of Cash Flows to see what went on during the latest accounting period with regard to changes in balance sheet debt and equity accounts. If a company is borrowing money while at the same time buying back company stock, you will see a line item called “proceeds from issuance of debt” that reflects a cash inflow that is larger than any cash outflow revealed on another line you might see called “repayment of debt.” Further, you will see a line that says “purchase of (treasury) stock.”

Too many times I’ve observed large companies supporting their stock prices by raising their net debt capital while at the same time using up company capital on buying back company stock. In many, many cases, the stock is not notably undervalued on virtually any basis one uses to define value. In fact, often the stocks seem overpriced.

Perhaps this post may be useful at times when you are analyzing companies.

I hope you are all doing well.

See you next time.