Jan 9 (Lagos) - As we all know we are in the middle of huge capital raises by various Banks, consumer goods and various other sector Companies. While these Companies issue billions of shares they also want you to believe in them that they are strong Companies and as shareholders we should trust them to make best decisions to grow these funds and deliver profits that translate into high dividends not just high management expenses and land cruisers for the management.
In reality, going by past experiences, these same banks were right here raising same kind of funds just 20 years ago. So in 20 years, they basically depleted themselves to levels that they are out again asking public for money and to trust them.
This time it will be different they want you to believe.
Lets us take a look at what happens when you issue billions of shares to the existing billions in ussue.
Lets make it simple and take an example of a Company with 10 billion shares and a new profit of N 10 billion trading at price of N 10 per unit on the exchange.
So earnings per share = N 1.00 per unit.
P/E Ratio = 10X
Now lets say the Company issues 20 billion units extra.
Now the earnings per share = 33 kobo per unit.
P/E Ratio = 30 X
This was a very simple example to show you that the same Company will have to grow its earnings many times over to come back to the same place it was at before they decided to issue new shares.
Rights issue is basically saying REST in PEACE to the EARNINGS PER SHARE. The key metric for shareholders.
Remember no one will tell you this when they want you to buy their rights issue.
Be careful out there. Its all merry when the price is going up. When the music stops, don't be the one left standing. Those of us around in the 2008-09 crash know how this plays out. Good luck.