The Downside of Issued Shares

November 2, 2017

I recently wrote about thinking like an owner, including the way it makes you look closely at board decisions. Today I wanted to discuss how going into investments as though you are the owner of the business can give you a good indication of the effectiveness of the board as well as the amount and price of capital that is issued.

 

By looking at the average price of shares that are issued you can get a good indication of how much of your company is being given away. For instance, your shares might be trading at $2.00, but the average price of shares issued during the year was $1.50. Effectively, the company is issuing shares at a 25% discount, so you are giving away part of your company to those new shareholders.

 

This all comes down to a question of value. Perhaps those new shareholders are adding value to the company, which ideally would produce a better outcome for you. If the shares were trading at $1.00 the year before then issuing shares at $1.50 might be a reasonable outcome. On the other hand, it’s not a great outcome if the share price was $2.00 a year ago, and hasn’t moved.

 

When looking at companies we invest in, we take a lot of time to look at the average price of shares issued during the period, and as owners of the business, we are concerned about it. When you start thinking like it’s your business these small things are important signs about how management and the directors are managing your company.

 

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