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  • The Daily Technical #127: What is the difference between unlevered FCF (FCFF) and levered FCF (FCFE)?

The Daily Technical #127: What is the difference between unlevered FCF (FCFF) and levered FCF (FCFE)?

How to answer "What are share buybacks and under which circumstances would they be most appropriate?"

March 06, 2025

Good morning. Welcome to the 127th edition of The Daily Technical.

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OVERVIEW OF YESTERDAY’S QUESTION
What are share buybacks, and under which circumstances would they be most appropriate?

A stock repurchase (or buyback program) is when a company uses its cash-on-hand to buy back some of its shares, either through a tender offer (directly approach shareholders) or in the open market.

The repurchase will be shown as a cash outflow on the cash flow statement and be reflected on in the treasury stock line items on the balance sheet.

Ideally, the right time for a share repurchase to be done should be when the company believes the market is undervaluing its shares.

The impact is the reduced number of shares in circulation, which immediately leads to a higher EPS and potentially a higher P/E ratio.

The buyback can also be interpreted as a positive signal by the market that the management is optimistic about future earnings growth.

Common Mistakes

  1. Assuming buybacks are always beneficial. They're most appropriate when shares are undervalued, not as a blanket strategy. Analyze market conditions thoroughly before making a recommendation.

  2. Forgetting to connect buybacks with financial statements. Always mention cash flow implications and how balance sheets reflect these transactions.

  3. Overlooking the impact on financial metrics. Recognize how reduced share count affects ratios like EPS and P/E, signaling potential benefits or disadvantages to stakeholders.

TL;DR

  • Share buybacks are when a company uses cash to repurchase its own shares via tender offers or open market purchases.

  • Reflects as a cash outflow on the cash flow statement; treasury stock adjustment on the balance sheet.

  • Best conducted when shares are undervalued to reduce shares in circulation.

  • Increases earnings per share (EPS) and can enhance the price-to-earnings (P/E) ratio.

  • Signals management's confidence in future growth, potentially boosting market perception.

TODAY’S QUESTION
What is the difference between unlevered FCF (FCFF) and levered FCF (FCFE)?

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DEAL TALK
Scopely to Acquire Niantic’s Gaming Division for $3.5 Billion

Niantic Inc., the creator of Pokémon Go, is in talks to sell its gaming division to Saudi Arabia-owned Scopely Inc. for $3.5 billion​. The deal includes Pokémon Go, Monster Hunter Now, and Pikmin Bloom.

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