How to find equity dilution and loss on investments?

Modified on July 16, 2018

The current article provides responses related to the following queries by asked by investors:

  • How to find out if a company has diluted its equity in the past?
  • How to determine if a company has lost money on its investments?

How to find out if a company has diluted its equity in the past?

Dear Vijay,

How do we know if a company has been diluting or is diluting its equity? I mean which data point should we look at to determine if equity dilution is happening and if yes, by how much?

In your excel template, we have “Share Capital”. If it increases by 20% this year with respect to last year, does it mean equity dilution has happened and its magnitude is 20%? And similarly, reverse with buyback?

If you can provide an example, it will be helpful.

Thanks

Author’s Response:

Hi,

Thanks for writing to us!

You are right that the dilution of equity, as well as its extent, is measured by the way of increase in share capital (paid-up share capital). The share capital of any company increases because of following activities:

  1. Issuance of new shares either by way of IPO/FPO/preferential allotment/exercise of ESOPs/warrants etc. All these actions lead to equity dilution because when these new shares are issued by the company for allotment to entities in such transactions, then the percentage shareholding of existing shareholders reduces.
  2. Issuance of bonus shares. This action does not lead to dilution as all the existing shareholders get an equal proportion of new shares so the percentage shareholding of all the promoters remains the same both before and after the issuance of bonus shares.

The share capital decreases because of buyback of shares.

Further advised reading: Understanding the Annual Report of a Company

Therefore, it becomes important that an investor should keep monitoring the changes in the paid-up share capital and in case there is an increase in any period, then she should check the annual report to find out, if it was due to issuance of new shares (dilution) or issuance of bonus shares (non-dilution).

All the best for your investing journey!

Regards

Dr. Vijay Malik

How to determine if a company has lost money on its investments?

First read: Analysis: Cupid Limited

Excellent analysis by you!

Point no 5 in the above analysis: Invested in Arihantsidh Properties Pvt. Ltd in 2016 whose value reduced to 600,000 and in 2017, it is written off. They did the same in 2013 too.

Does it mean that invested amount is not collectible or that investment was sold off?

If it was sold off, then the amount received should be shown in accounts under which heading? 

Author’s Response:

Hi,

Thanks for writing to us!

Writing off an investment indicates that the investment is non-collectible. In such cases, the companies show “Provisions” for diminution of value of investments in the annual report. This entry would be found on both the balance sheet as well as the profit and loss statement. In the balance sheet, the provision will be shown in the non-current assets, where the details of the original investments are shown. In the profit and loss statement, the provision will be shown in the “other expenses”.

In case, the company has sold off the investment, then the company will show the amount received in the cash flow statement as an inflow under the segment “cash flow from investments” (CFI) section. Alongside, in the profit and loss statement, the company will show gain or losses on the sale of investment most of the times in the “other income” section. Many times, the losses might be shown in the “Other expenses” as well.

Further advised reading: Understanding the Annual Report of a Company

Hope it answers 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.

"Peaceful Investing": My Stock Investing Approach

“Peaceful Investing” approach is the result of my more than a decade of experience in equity markets. This approach helped me invest even when I had a full-time corporate job and could not spare a lot of time for stock analysis. During my investing journey, I have faced all the common challenges of the investors, the biggest one being “scarcity of time”. “Peaceful Investing” approach keeps in mind that an investor will have limited amount of time to spare for stock investing. 

The objective of “Peaceful Investing” approach is the selection of such stocks, where once an investor has put in her money, then she may sleep peacefully. Therefore, if later on, the stock prices rise, then the investor is happy as she is now wealthier. On the contrary, if the stock prices fall, even then the investor is happy as she can now buy more quantity of the selected fundamentally good stocks.

Watch Balance Sheet Analysis through a Free Sample Video:

Play Video

Follow My Portfolio with Latest Buy/Sell Transaction Updates

  • Historical annualized return (CAGR) of the portfolio 47.59% against CAGR of Sensex of 10.48%
  • We identified companies, which were later invested by Sanjay Bakshi, Mohnish Pabrai, PE funds, Mutual Funds
  • See details of stocks in our portfolio
  • Get updates of buy/sell transactions in our portfolio by email

Join 30,000 subscribers & get our "Case Studies" e-book for FREE:

  • Get a Free e-book on "Peaceful Investing" case studies and learn by reading live company analysis
  • Get immediate notification on our future articles & company analysis delivered to your email
  • You will receive the e-book immediately by an email from vijay.malik@drvijaymalik.com.
  • If you do not find our email in the inbox within next 5 seconds, then please search in spam/social/ promotions folders

Please share your comments here:

Analysis: Globus Spirits Ltd

The current section of “Analysis” series covers Globus Spirits Ltd, a manufacturer of country liquor (IMIL) and bottler for Indian made foreign liquor (IMFL) having

Read More »

Analysis: Mahanagar Gas Ltd

The current section of “Analysis” series covers Mahanagar Gas Ltd, the distributor of natural gas in the Mumbai and Thane region supplying piped natural gas

Read More »

Analysis: Albert David Ltd

The current article of “Analysis” series covers Albert David Ltd, a Kolkata based Indian pharmaceutical manufacturer producing acute therapy drugs and human placenta extract based

Read More »

Analysis: Stovec Industries Ltd

The current section of “Analysis” series covers Stovec Industries Ltd, a leading producer of printing machines & consumables for textile printing, graphics printing. The company

Read More »
Bitnami