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dpdoor (36.35)

Just Issue More Shares?

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4

August 28, 2010 – Comments (9)

When a corporation issues more shares this reduces the value per share. But what does the revenues from the sell do to the bottom line?

As a skeptic of corporations at heart, I am going to go ahead and assume that the proceeds form the sell of their newly issued stocks makes it’s way in to the finical statement as a profit . It should not be shown as profit but looking at corporations financial statement you may notice a unexpected large increase in profit after issuing more shares.

Buy doing a little algebra on a spread sheet you can see that for every time a company issues 10% more shares their profit increases 90%.

The math I used: {1Billion x 10 per share = 1b add 10% shares 1.1bill, diluting the shares reduces the stock price to $9; 9 x 100mil shares = $900mil; 1b + .9b = 1.9 billion dollars, you are now up 90% with only 10% more shares.}

If their current p/e is higher or if this helps raise their p/e then the profit increase is an even higher percentage, with profit increases form 90 to 900% easily done.

Once I found it is profitable I looked at companies financial statements to see if it matches.

Since most companies had losses before issuing extra shares I simply found out how many more shares they had out in one quarter over the last , lets say it was 500million, then multiply that by the selling price during that quarter, lets say $10 and sure enough this quarter was up 5 billion. Of course this was just enough to show a respectable and believable profit.

In my opinion this profit is just a money pyramid profit not earned profit. Even if a company does not make money other ways it can do this for a couple of years or a couple of decades. Eventually it unravels, their stock drops 75% or more and the they either go bankrupt, have to borrow large amounts of money or get bailed-out by us.

Another thing is that a stock at $12 is the same as $24 when it had half the shares. This makes it hard to compare their stock to historical prices and is hard to value it’s target price.

9 Comments – Post Your Own

#1) On August 28, 2010 at 10:11 PM, blesto (31.03) wrote:

+1 rec

What happens to their financial statement when they buy back shares?

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#2) On August 28, 2010 at 10:20 PM, atarigod (< 20) wrote:

Read a begining accounting text. When a company issues shares they do not record profit. It is a balance sheet transaction debiting cash and crediting equity.

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#3) On August 28, 2010 at 10:29 PM, dpdoor (36.35) wrote:

Yes it is an balance sheet entry but as I stated I believe it makes it’s way into the bottom line thought “creative bookkeeping”

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#4) On August 28, 2010 at 10:43 PM, dpdoor (36.35) wrote:

when a compnay buys back shares I see that as a good thing. They would have to have the capital and were that comes from could be from profits.

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#5) On August 29, 2010 at 4:47 AM, lorteungen (99.76) wrote:

Your math is broken and you're mixing up the numbers.

"1 Billion x 10 per share = 10b add 10% shares 1.1bill, diluting the shares reduces the stock price to $9.09; 9.09 x 100mil shares = $909 mil; 9.09 b (1 billion * $9.09) + 0.909 bill = 10 billion dollars, you are now up 0% with only 10% more shares."

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#6) On August 29, 2010 at 4:49 AM, lorteungen (99.76) wrote:

Also I don't see how you got the p/e into it, you never mentioned the company's earnings, only their marketcap and share price

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#7) On August 29, 2010 at 4:58 AM, dpdoor (36.35) wrote:

lorteungen, thanks, I wrote it a little to fast and did not copy it correctly,

but the fact still is becuse of the p/e ratio if a company issues more stock the money recived is much more then the added shares reduce the price per share.

It;s kinda cool though that you took the time to try the math.

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#8) On August 29, 2010 at 5:02 AM, dpdoor (36.35) wrote:

I used a p/e of 10 for the test, The ernings would be one billion, 1b shares x 10 per share divided by the pe of 10.

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#9) On August 29, 2010 at 5:44 AM, dpdoor (36.35) wrote:

it is easier with smaller numbers.

100 earnings

100 shares

1 eps

10 pe

10 price per share

10 more shares added

9 new share price due to 10% more shares for same market cap 

90 new money from sell of 10 shares at new price.

this is 90% of earnings

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