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by twmahna
2096 days ago
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> It doesn't work this way. Companies aren't valued based on how much cash they have on hand. Uh, yea they are. A company’s valuation is based on both the cash they have on hand AND future discounted cash flows. Once you correct your understanding of this, you will see that GP is explaining things correctly. |
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If a companies liquid assets are more than a small fraction of the companies value, then management is doing something seriously wrong. Some valuation formulas punish companies who have excessive cash on hand.
Going to quote my original reply because I'm tired of repeating this point.
> Share buybacks are absolutely a good deal for shareholders when a company is undervalued.
If a company is undervalued, then the share price is less than the future earnings of the company. The value of their future earnings might be $1.01. If they buy back shares, they are paying $1 for $1.01 worth of future earnings which are realized by existing shareholders.
A classic example of this is Apple buying back shares over the past 5-10 years or so (less clear now with share prices being so high).
If a company is valued higher than the companies future earnings or the company needs to take on debt to buyback shares then it doesn't make any sense.