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Q&A: Bonus Shares

Modified on January 13, 2019

The current article in this series provides responses related to:

  • Role of current maturity of long-term debt (CMLTD) in total borrowings
  • The impact of new/bonus shares on P/E ratio, EPS etc.
  • Getting information about small/mid cap stocks

 

Query

Current Maturity of Long Term Debt (CMLTD)

Hello Vijay,

I had downloaded your Excel template that is useful for my analysis thank you for that.

Read: Download Dr Vijay Malik’s Screener.in Stock Analysis Excel Template

I have few things know about your excel template, as per your excel template total debt is referred as borrowing from the data sheet. Borrowing means (long-term borrowing +short term borrowing)? Or anything else I need to add? If it is only long term + short term borrowing then as per balance sheet for 2014 it should be ₹69cr and 2015 it should be ₹49cr but in our template, it is showing ₹100cr and ₹63cr. why is it so? I have referred many company annual reports and I have the same error.

Please clarify

Regards

Answer:

Hi,

Thanks for writing to me and subscribing to the premium services of drvijaymalik.com!

Total debt includes:

  1. Long term debt
  2. Short term debt and
  3. Current maturity of long-term debt (CMLTD), which is included in the section “Other current liabilities (OCL)” in the balance sheet.

An investor would find the amount of CMLTD when she reads the detailed notes/schedules, which provide the breakup of OCL.

Once the investor adds up LTD + STD + CMLTD, then the correct amount of total debt would be arrived at.

Read: Understanding the Annual Report of a Company

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Query

Sir could you please give me some idea on adjusted eps and peg ratio (mainly when new shares are issued either bonus shares or right shares).

Do I need to adjust P/E ratio when new bonus or right shares are issued? If so, then historical eps will always be low since when new shares are issued, past earnings are to be divided by new increase number of shares and this gives the impression that eps is always growing.

And how to calculate peg ratio when new bonus or right shares are issued. G in peg is growth in eps. If there were no new shares, then eps and peg ratio will be easy to get and compare but with new shares, everything is diluted and I am confused what right method for getting correct calculations is.

Thank you very much.

Answer:

Hi Ramesh,

Thanks for writing to me!

There is no change in either P/E ratio or PEG ratio on the issuance of new shares under bonus shares. Both the share price as well as the EPS changes in the same proportion. For example, if one additional share for one existing share is issued, then both the share price, as well as EPS, will become half. The growth rate of EPS in percentage will remain the same. Therefore, there will be no change in P/E or PEG.

Read: How to do Valuation Analysis of Stocks

In the case of the rights issue, the issuance of new shares will bring in additional cash, which would lead to an increase in book value and reduction in debt to equity ratio, improved liquidity. Therefore, the equation will not be as simple as it was in the case of bonus shares. The market may increase or decrease the P/E ratio of the stock after the rights issue depending upon the market response.

In order to avoid the confusion related to change in EPS and price per share etc., which results in issuance of new shares, it is advised that investors calculate P/E ratio by the formula (Market Capitalization / Net profit after tax). This formula will simplify the understanding for the investor as the net profit figure does not change upon issuance of new shares.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Query

Hello Dr. Vijay Malik,

First of all, I would like to thank you for creating such useful pool of information and I must say your writings are very encouraging and extremely useful for a retail investor.

I am not sure if this is the right place to post my query but I found it to be relevant place in a way so I am putting it up here. My concern is “How to get reliable information especially on small cap/mid cap stocks”

I read your analysis and Q&A on Zenith Fiber although it is one year old and things might even change in a year time. But the key concern I thought was management not expanding the capacity. I thought I will check on the capacity utilisation levels currently and then see if they can push the existing assets to get more production or they are maxed out and they definitely need to invest more to build up the extra capacity. The annual report (latest available on Moneycontrol) didn’t mention anything on the existing capacity and/or future expansion plan.

Read: Analysis: Zenith Fibres Limited

When I googled this, I found a news item in Business Standard. As per this news, they were going to expand to 50% capacity in 2011. However, in the analysis details, I noticed that the capacity hasn’t changed since last 10 years. Now, I couldn’t find any news item confirming that above plans went up for a toss or couldn’t be executed for some reason.

It would be great if you can comment on the capacity issue of Zenith Fiber. Also, in general, if you can suggest any other source of reliable information apart from Moneycontrol, screener, and company website to confirm such level of details which can really be crucial for our investing decision?

Thank you so much in advance for your time and your guidance!!!

Best Regards,

Answer:

Hi Abhishek,

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

I would not be able to go into the specific issue of Zenith’s capacity addition. However, let me tell you about the sources that can be used to assess capacity expansion or utilization levels of a company.

  1. Company’s Annual reports of the period around the expected capacity addition would describe the progress and status of capacity addition plans.
  2. Company website along with corporate presentations would mention about the capacity additions
  3. Credit rating reports of the company around the period of capacity addition, would comment about the funding plans of the company, progress of projects as per plan and cost overruns if any.
  4. If none of the above sources provides the investor with the required information, then the investor should contact the company directly by calling/emailing the investor’s contact person (usually the company secretary).

Advised reading: How should investors contact Companies/Management for clarifications or additional information?

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Dr. Vijay Malik

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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