The current article in this series provides responses related to:
- Queries on analysis of Control Print Limited
- Self-Sustainable Growth Rate (SSGR)
- Reader’s (Naveen Kumar) inputs on detecting accounting frauds
- Should one invest if he is sure about future equity dilution in a company
Query: Control Print Limited
Sir, Your analysis is excellent. I am posting the following doubts 5 months after the post; I hope they will still be useful for newbies like me.
While researching control print, I found that the promoters have issued themselves 3.75 lakh convertible warrants in 2013. The company does not have any debt. Why does a management issues preferential warrants to itself:
- As part of compensation or for funding the company?
- Is it better than taking debt?
I see that over the last few years, that the total number of shares in issue has increased and the percentage of promoter has also increased. Is it in shareholder’s interest when the number of shares increase without any bonus shares or splits?
Thanks for writing to me! I am happy that you found the article useful.
As different individuals have different risk appetite, similarly it is with the companies. Some seem to prefer debt when short of funds, others prefer equity.
Issuing warrants to raise funds (equity) would depend upon the risk appetite of company. At end of the day, equity owners won’t ask their money back in tough times.
An existing investor in a company should be concerned about the exercise price of the warrants. If it allows the promoters to convert it into share at attractive terms, then it becomes a tool for promoters to benefit at the cost of public shareholders. Warrants are a form of stock option.
If exercise price is sufficiently higher than current price considering the time after which warrants become convertible, then no concern for other shareholders.
Equity dilution (increasing number of shares without split or bonus) is generally not perceived to be good by investors. However, I believe that it is a company’s decision which also behave like individuals do when it comes to raising debt or not. Therefore, an investor should decide from case to case basis depending upon the terms of warrants/convertible securities and the purpose of equity dilution.
Hope it helps!
Self-Sustainable Growth Rate (SSGR)
I have a similar but simpler rule of thumb:
Over a period of years, a company should be able to increase book value at the same time reducing debt and if debt is already zero then dividends should be increasing. This is probably not as deep as your formula but as a rule of thumb it removes a large number of companies, which would also be removed using your formula.
In either case, the idea is the same – we want to find companies, which are generating enough cash that further capex is being internally funded and enough free cash flow (FCF) that shareholders are getting benefited.
Thanks for your feedback and valuable inputs!
You are right that the rule of thumb described by you, does has the potential of segregating “good” companies from a number of “not so good” companies.
You may read about inputs of other readers to Self-Sustainable Growth Rate (SSGR) in the following article:
All the best for your investing journey!
Reader’s inputs about additional red flags in companies
Thanks for the article Vijay.
Few more additional things which can be added to the checklist could be:
- Auditor disclosures/comments about non-recognizable income
- Increase in other income to inflate profits (Capitalizing arbitration income whose outcomes are uncertain),
- Promoter background, & frequent changes in key management persons (CFO, board of directors etc.),
- Consistency in Tax rate (very difficult to analyze, request you to write about it sometime about various tax outgo),
- Increase in Loans and Advances, corporate guarantee and contingent liabilities are few signs which should raise alarm about the authenticity of their result.
Thanks for your feedback! I am happy that you found the article useful.
I thank you on behalf of all the readers of www.drvijaymalik.com for your valuable inputs!
I might write an article about corporate tax, however, it might take some time.
All the best for your investing journey!
Should one invest if he is sure about future equity dilution in a company
I want your view on 1 situation:
If a company is expanding its business & growing at decent growth rate (>30%) and if the expansion depends on a combination of equity and debt instruments that include issue of fresh equity shares, non-convertible debentures (NCDs) and fixed deposits.
Should we invest in such company where we know that equity dilution is going to happen?
There is no one road to success. It depends on the risk appetite of the investor, which companies she should invest in.
If an investor finds the business good enough and feels comfortable in investing the company with features described by you, then she can take the decision she feels convinced about.
It cannot be said with certainty that the company described by you will not see rise in its stock price.
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