The double edged sword: Stock warrant liability and increasing share price
An interesting side effect of complex marketplaces is that information taken at face value can often result in misleading conclusions. Financial instruments can seemingly blur the line between equity and liabilities however, in most cases this process is regulated and done in a standardized manner. Although this subject is indeed as boring as the last few sentences it can have surprising and important implications regarding positions in a real life portfolio.
For example; share price is generally an important point of interest for investors and seemingly more positive when it is on its way up, or is it? This is just the dilemma that will be evaluated using Universal Display Corporation (PANL) as an illustration. Outstanding warrants to purchase shares of common stock can drastically change the face of a company's financial results, specifically EPS, and in turn alter short term share prices. As share price increases the fair value of these warrants also increases resulting in a liability via the down round provision. While Universal Display Corporation's (PANL) financials missed analysts EPS estimates last quarter the reasoning behind the missed projection makes a huge difference in evaluating a position or interpreting a company's financials.