Most investment bankers will enthusiastically extoll the virtues of share buybacks and normal-course issuer bids (NCIBs). Beyond providing program management revenue to the investment banks, these programs can certainly benefit some companies. However, most management teams are unaware of their hidden dangers.
Investors and boards view buybacks as a smart way to return capital to shareholders while also creating positive lift in the share price. However, buybacks can backfire for companies with small floats or weak liquidity. First, we’ll review the commonly understood benefits of buybacks. Then, we’ll dig into why buybacks can harm a company’s valuation under certain conditions. We’ll provide real-world cautionary lessons. Finally, we provide a checklist for management and directors to avoid value destruction.
Why Companies Use Share Buybacks and NCIBs
A share buyback (or share repurchase) happens when a firm uses its cash (or sometimes debt) to purchase its own shares from the market or directly from shareholders. In an NCIB, the company repurchases shares gradually over time, typically on the open market. This makes NCIBs a popular mechanism for returning capital to shareholders without committing to a fixed dividend, especially among North American firms.
Boards often choose buybacks for reasons such as:
- Return excess cash to shareholders without committing to ongoing dividends.
- Raise per-share metrics: fewer shares outstanding can boost earnings per share (EPS) and possibly make the stock more attractive.
- Signal confidence: management may indicate they believe the stock is undervalued, shaping market perception.
- Offset dilution from stock options or other share issuances.
- When compared to other uses of cash such as asset purchases or organic growth, the return profile can be better.
Because of these advantages, buybacks remain a popular capital-allocation tool among many public companies.
Commonly Understood Benefits of Share Buybacks
Buybacks and NCIBs can offer real advantages to companies and shareholders. Some of the main benefits include:
- Improved EPS and valuation metrics. By reducing the number of shares outstanding (assuming net earnings stay unchanged), EPS per share increases. That means more profit per share.
- Flexibility compared to dividends. Buybacks can be started, paused, or stopped depending on business conditions. Dividends create an expectation of ongoing regular payments that, if trimmed or stopped, can crater a company’s share price.
- Efficient use of excess cash when growth options are limited. If a company lacks profitable reinvestment opportunities, returning cash via buybacks can be logical rather than holding idle cash.
- Support for existing shareholders. Investors willing to sell during a buyback can realize value directly rather than wait for dividends or capital gains.
- When used cautiously and under the right conditions, buybacks can align capital allocation with shareholder value creation.
When Buybacks Turn Risky — Small Float & Low Liquidity
However, buybacks are not always a good move. For companies with a small public float or weak trading volume, the risks may outweigh the benefits. Here are key dangers:
Sharpened Price Volatility and Liquidity Risks
Reducing the float further decreases the number of shares available for trading. That can lead to wide swings in share price when even small trades happen. Especially in thinly traded or micro-cap firms, even modest repurchases can meaningfully distort liquidity and trading dynamics.
Lower liquidity makes it harder for investors to enter and exit without moving the price irrationally. For small-cap or micro-cap firms, this scares away institutional investors, reduces market interest, and exacerbates share price volatility under stress.
Artificial Metrics, Not Real Value
Buybacks boost EPS without improving actual business performance or long-term cash flow. This can give a misleading impression of growth or value.
If a firm uses cash that it might need for operations, growth, or debt service, then buybacks risk undermining long-term financial health.
Misaligned Incentives and Governance Risks
Management may use buybacks to hit EPS-linked compensation targets or to mask weak operations, rather than for genuine value creation.
Buybacks can reduce float but not real share ownership concentration. That increases the influence of insiders or large shareholders. For companies with small floats, that concentrates control and sometimes creates governance vulnerabilities.
Reduced Financial Flexibility and Long-Term Risk
Once a company uses cash for buybacks, that cash is gone. If the company faces unexpected needs in the form of a market downturn, investment opportunities, rising debt costs, it may have fewer options. This is worse when buybacks are funded by debt.
Over time, repeated buybacks without corresponding growth or reinvestment can crowd out capital allocation for innovation, R&D, expansion, or debt reduction. That can erode future competitiveness and stability.
These dangers are especially acute in firms with small floats, thin trading volumes, or limited cash flow reliability.
Governance, Long-Term Health, and Debt — Why Buybacks Need Caution
A growing body of research and commentary warns that share buybacks can undermine corporate governance and long-term health.
Some of the core concerns:
- Buybacks may signal a lack of attractive growth opportunities. Executives may choose buybacks instead of investments in innovation, capital expenditures, or debt reduction.
- If funded via debt, buybacks increase financial risk. A company that borrows to buy its shares may boost short-term metrics while weakening its balance sheet for future storms.
Buyback programs are often discretionary. If management lacks discipline or transparency, they might use buybacks for short-term “boosts” rather than sustainable growth.
For small-float firms, governance matters even more. Without a broad shareholder base, oversight becomes harder. Buybacks may amplify control by insiders at the expense of minority shareholders.
From an external perspective, continued NCIB programs can be a sign that management does not have opportunity or perceived opportunity to grow the company organically or grow the earnings base – this is sometimes a result of where an organization is in its maturity cycle, such as near the end or in the harvest stage. While this can make sense for an organization at that stage, it may not be appropriate for newer companies.
When Real-World Buybacks Backfired — What Went Wrong
While many buyback programs go smoothly, there are cautionary cases. Analysts have studied failed or problematic repurchases, including among small or thinly traded companies.
Some failures stem from:
- Overpaying for shares when valuations were high. That removed cash from the company without creating long-term value.
- Using debt or draining cash reserves to fund buybacks — leaving the company vulnerable when earnings or cash flow declined.
- Masking poor performance with improved EPS; when results weakened or investors lost confidence, share price collapsed.
- Reducing float and liquidity — making it hard for investors to exit or for the company to attract new investors or capital when needed.
These lessons are especially relevant for small-cap firms, where a buyback that equals a modest share of outstanding float can meaningfully distort liquidity and control.
In many of those cases, the buyback may have looked good on paper, but the company emerged with weaker financial flexibility and greater exposure to volatility. The following examples are illustrative of these failures:
Tecsys Inc. (TSX:TCS)
TCS renewed its NCIB on Sept 20, 2024 with a limit of 500,000 and a daily cap of 2,117 based on average daily trading volume (“ADTV“) of 8,469. The NCIB continued in FY25 with 172,200 shares repurchased; Q1 FY26: 21,300 shares repurchased.
Canadian North Resources Inc. (TSXV:CNRI)
CNRI announced their NCIB Apr 5, 2024 and by Feb 20, 2025 had repurchased 162,500 shares at ~$0.97. A new NCIB commenced Apr 28, 2025 with 78,400 shares bought back and cancelled by Sep 30, 2025.
A Checklist for Boards and Executives: When to Pause or Skip Buybacks
If you run or direct a public company, especially a small-cap or thinly traded firm, consider the following before launching a buyback or NCIB:
- Is the public float large enough and is trading volume healthy? If not, buyback may hurt liquidity.
- Are the shares undervalued relative to true business fundamentals? Avoid buybacks when shares appear overvalued.
- To fund the buyback Is the company using excess cash that is not needed for operations, growth, or debt service?
- Is the buyback a better use of cash than capital investment, debt reduction, or building a cash cushion for downturns?
- Are governance and disclosure standards strong? Ensure transparency around motivation, size, timing, and method of buyback.
- Is management’s compensation plan agnostic towards the impact of buybacks? If it rewards EPS concentration to the exclusion of other profitability metrics it creates a conflict of interest.
- Are your shareholders aligned with this? What are their expectations of value creation for your organization?
If you answer “no” or “not sure” to any of those, you should pause or reconsider the buyback.
Conclusion
Share buybacks and NCIBs remain a powerful tool for capital allocation. They can deliver real benefits when used prudently. However, as we have seen, companies with small floats or poor liquidity face real risks. Buybacks in those circumstances can create more harm than value. Boards and executives must think critically about long-term financial health, liquidity, investor fairness, governance and not just about short-term metrics.
Frequently Asked Questions (FAQ)
Is a share buyback a good thing?
A share buyback can be good when a company has excess cash, limited growth opportunities, and relatively stable fundamentals. In that case, reducing outstanding shares can raise EPS and deliver efficient returns to shareholders.
What are the disadvantages of share buybacks?
Buybacks may mask weak business performance, reduce liquidity, concentrate ownership, deplete cash reserves, or increase debt… all of which can harm long-term company health and shareholder value.
When should companies avoid engaging in a share buyback?
Avoid buybacks when shares seem overvalued, when trading volume or float is low, when the company needs cash for growth or debt service, or when governance and transparency are weak.