Just Issue More Shares?
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.
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