Effect of treasury stock

Picked up from one blog.... to keep in in my notes when i wanted to go through it.. i have not done analysis..

After reading an article in Business week (online dated Jul-2/2007) about the top 100 tech companies ranked by ROE and discovering Accenture’s ROE as 66%. I calculated its ROE for the last five years (as of Aug-31 for the corresponding year). To my surprise I found that the ROE has reduced over the period of 5 years. It was at an astonishing high level of 131% on Aug-31/2002. Following table gives a snapshot of some important numbers pertaining to its ROE for last five years.

In millions



2006 2005 2004 2003 2002

Book value $1,890 $1,690 $1,470 $831 $438

Net sales $18,200 $17,090 $15,110 $13,390 $13,100

Net income before minority interest $1,430 $1,500 $1,220 $1,040 $576

Minority interest $460 $568 $532 $549 $332

Net income $973 $940 $691 $498 $245

ROE (net income) 51.48% 55.62% 47.01% 59.93% 55.94%

ROE (net income before minority interest) 75.66% 88.76% 82.99% 125.15% 131.51%










The reason I have calculated two ROEs is to demonstrate the effect of dual share class that has given rise to minority interest , as this amount is significant so it distorts the net income. This is evident from the fact that the ROE calculated by considering net income before minority interest varies from 75% to 131%. Whereas the other ROE (calculated just from net income) varies from 51% to 55%.



NOTE : Return on equity (ROE) is defined as (net income / shareholder’s equity)



A close look at the different components of book value reveals the following:



In millions





2006 2005 2004 2003 2002

Class 'A' common shares $14.00 $13.00 $13.00 $10.00 $10.00



Class 'X' common shares $6.00 $7.00 $9.00 $11.00 $13.00



Restricted share units (related to Class 'A' shares) $482,289.00 $365,708.00 $475,240.00 $669,860.00 $848,218.00



Deferred compensation $0.00 $0.00 -$150,777.00 -$112,251.00 $0.00



Additional paid in capital $701,006.00 $1,365,013.00 $1,643,652.00 $1,501,136.00 $1,397,828.00



Treasury shares -$869,957.00 -$763,682.00 -$132,313.00 -$88,198.00 -$315,486.00



Treasury shares owned by Accenture ltd share employee compensation trust $0.00 $0.00 -$296,894.00 -$308,878.00 -$221,110.00



Retained earnings $1,607,391.00 $962,339.00 $46,636.00 -$641,915.00 -$1,190,415.00



Accumulated other comprehensive loss -$26,494.00 -$232,484.00 -$113,760.00 -$188,233.00 -$80,432.00



SHAREHOLDER'S EQUITY $1,894,255.00 $1,696,914.00 $1,471,806.00 $831,542.00 $438,626.00








From the above table three things are clear :




1. The high ROE in 2002 was because of a large deficit in retained earnings that in turn reduced the book value. This started in the year 2001 ($1.43bn deficit) when the company broke from its traditional partnership type organization and became public. It can be seen that this got reduced in subsequent years and in 2006 was $1.6 bn



2. Additional paid in capital has decreased since 2002 and treasury stock has increased since then. Both together have decreased the book value.



3. As the company’s Net income before minority interest grows and its effect of minority interest gets reduced so the difference between two ROEs will also get reduced.



EFFECT OF TREASURY SHARES cost of shares in millions






Year Treasury shares COST

2002 12.5mn -$315,486

2003 5.2mn -$88,198

2004 6 mn -$132,313

2005 32mn -$763,682

2006 36mn -$869,957





Above fig shows the amount of treasury shares held by the company. It can be seen that the figure has been changing every year. As a conservative estimate let us assume that the number of treasury shares would have remained 6mn on Aug-31,2006 instead of 36 mn. The amount against treasury shares would have reduced from 869 mn to 144 mn. This would have increased the book value at least by 725mn. Thus making the book value around $2.6 bn. Making the two ROEs as 37% and 53% (ROE with net income before minority interest) instead of the present 51% and 75%.



CONCLUSION : So if you are comparing Accenture to its competitors and are impressed by its ROE then you might want to look at the details of its competitors’ book value and make sue you are comparing apples to apples.



Posted by Dayanand Menashi at Monday, June 25, 2007

Labels: Analysis of Accenture's stock