Category: Investment Management

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Finance basics Investment Management

Share capital, definitions and types

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Shares:

The term shares frequently refer to ‘share capital’. The word ‘shares’ is used as a short form of ‘share capital’.

Capital:

Capital usually refers to investment in a business. It is money for starting or investing in a company. Sometimes, the word ‘capital’ is also used as a short form of ‘share capital’. However, the word ‘capital’ includes both shares and long term borrowings.

Share capital:

Share capital refers to the money which is attributable to the owners of the company: This includes common stock and preferred stock (but does not include borrowings and debts).

Ordinary share capital (or common stock):

Ordinary share capital or common stock refers to primary shares of the company. This type of shares of the company contains ownership rights, and this is the most common type of shares. These shareholders have the rights to appoint the company’s directors at the election of shareholders.

These shareholders have the residual interest in the company, i.e., in the case of winding up of the company, whatever remaining assets will remain after payment of all other liabilities, loans, preference dividend, taxes etc. that residual assets will be distributed among ordinary shareholders.

Preference share capital:

Preference share capital is the second type of share capital where preference shareholders are entitled to a predetermined preference dividend. The dividend amount is fixed at the time of issuance of these shares. These shareholders usually do not have voting rights at the annual general meetings of the company. These shares do not have an expiry or maturity date, similar to ordinary share capital.

 

Authorized share capital:

Every company is run under defined regulations contained in the memorandum of association and the articles of association of the company. These regulations specify an authorized amount of the share capital of the company. The authorized share capital of the company is the maximum amount of share capital which a company can issue. For example, a company’s regulations may state that the authorized share capital is $10,000,000. This clause means that the company can issue a maximum of $10,000,000.

The nominal value of shares:

Nominal value of the stock is the value of the share stated on its share certificate. The nominal value of the share is the par value of one share of the company. Usually, the nominal value of the shares is $1. However, these shares may be traded on a stock market at a value significantly higher than the nominal value, e.g., $5 or $20.

The market value of the shares:

The market value of the shares is the value of the share at which a transaction is carried out in the market. The market value of the shares may be significantly higher (or lower) than the nominal value of the shares.

 

 

Issued Share Capital:

Issued share capital means the amount of share capital which has been issued by the company out of its total authorized share capital. Let’s say that if the company’s authorized share capital is $10 M, the company may issue only $2 M out of it at one instance. Later on, the company may issue further shares of $1 M. Thus; company’s issued share capital is always less than or equal to its authorized share capital. It is important to note that the value of the issued shares of the company in the company’s balance sheet will always be represented at the nominal value of the shares. For example, the $2 M issue which we talked about here, is the nominal value of the shares and not the market value.

Let’s say that if the nominal price of a company’s share is $1 per share, and it issues 1 million shares at a market value of $2 per share. In this case, the company’s issued share capital shall be considered as $1 M only. This is because issued share capital is booked at the nominal value of the shares of the company.

Issuance of share capital:

Issuance of share capital means that the company collects share price from the investors and award them shares of the company (in the form of written certificates). Once investors purchase these share certificates, those investors become shareholders of the company.

Share certificates:

Share certificates are the written pieces of paper which contain the number of shares and the name of the shareholder duly authorized by the company. For a shareholder, a share certificate is proof of the share ownership.

 

 

Subscribed share capital:

Subscribed share capital is the amount of the share capital, which has been purchased by the shareholders. This is usually equal to the issued share capital. For the sake of understanding, consider the below press release from a company, “We had announced to issued $ 2M share capital, and all of that got subscribed within a week.” This statement means that when the company announced to issue share capital and invited investor to invest money, the investors subscribed (submitted application forms along with fees, etc.) all share capital.

Paid-up Share capital:

Share capital of the company for which the shareholders have made payment to the company. Shareholders are liable to make the payment for the shares after they subscribe to the shares within a particular time. Sometimes, a shareholder may subscribe the share capital by submitting application forms, but later on, does not complete the payment. However, usually, paid-up share capital is equal to the subscribed share capital of the company, which in turn is equal to the issued share capital of the company.

Called up share capital:

This is the part of the share capital for which the subscribers have not made payment of the share capital, i.e., shareholders. For these shares, the company has requested the payment, but payment is not yet made. Called up share capital is a contrast to paid-up share capital. Once the payment for the called up share capital is made, it will be converted into paid-up share capital.

Callable share capital:

This is the part of the share capital for which payment has not yet been requested by the issuer of the capital. The company has the right to call up (i.e., raise demand for the payment against these shares) against this share capital.

Share premium:

Payment made by the shareholders to the issuer company for the purchase of shares in excess of the nominal share price of the company. This means that if the company’s nominal value of shares is $1,000 (i.e., 1,000 shares for $1 each) and the company issued these shares at a price of $1.5 each, i.e., for $1,500 then the additional amount of $500 ($1,500 minus $1,000) will be share premium. Share premium is kept as a capital reserve in the books of the company.

Issuer company:

A company which is issuing its shares to the investors/shareholders is called issuer company.

Capital reserve:

A capital reserve on the balance sheet of the company is a reserve which is not created through routing profit from profit and loss account. This means that this reserve is not created from the profits of the company. Instead, this reserve is directly created from contributions from some other sources. For example, the share premium payment made by shareholders above the nominal price of the share is reserved in the share premium account. This share premium account is an example of capital reserves. Another example of the capital reserve is an asset revaluation reserve which is created as a result of an upward revaluation of property, plant and equipment. A capital reserve cannot be used to pay dividends to the shareholders.

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Categories
Investment Management Ratio analysis

Earnings Per Share (EPS)

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Earnings per share = Net Profit After Interest, Tax and Preference Dividends / Number of Shares

 

Earnings Per Share or EPS is a measure of the financial performance of an organization. The ratio of EPS informs shareholders of the amount of profit attributable to each share of the company. EPS is the amount of profit earned per share of the company. The result of the ratio is in absolute amount, and a higher amount represents better performance.

Let’s say that if a company’s net profit after interest and tax is $50,000 and there are a total of 5,000 issued shares of the company. In this case, the earning per share of the company will be $5 per share.

 

 

In the EPS calculation formula, take the number of shares in the denominator as the weighted average number of ordinary shares outstanding at the date for which you are calculating EPS.

It is essential to understand that EPS is a very indicator of a company’s financial performance. It is even a better indicator than profit for the year.

Let’s take the example in the below table containing some fictitious companies’ data. We can note that Zakoota LLC has earned a profit of $900,000, much higher than the profit of the other two companies, but it has a lower EPS of $36 than the other two companies.

 

 

The earning per share (EPS) is simple to understand ratio and an ordinary investor or shareholder can interpret it easily. The higher the per-share earnings is, the better the company’s performance is. If the answer of the ratio goes into a negative figure, then it means there has occurred a loss per share equivalent to the amount of the ratio.

Earning per share is also referred to as basic earnings per share or simple earning per share. All that we have read above is about basic earnings per share or simple earning per share. One variation of the EPS is to calculate primary Earning Per Share (PEPS). Primary earning per share excludes preference dividends from the formula of EPS.

 

 

Diluted Earnings Per Share

Let’s assume that if a company issues additional shares, then the existing income will be divided among more number of shares. This increase in the number of shares will decrease (dilute) earnings per share.

Diluted earning per share takes into account of all convertible share options. If all convertible share options get converted into ordinary shares, then the total number of shares will increase and earning per share will decrease.

So, to understand, what will happen if lenders exercise all the conversion options, we can calculate diluted earnings per share.

Convertible options mostly comprise of staff share options, directors share options, convertible preference shares, convertible bonds etc.

The formula for calculation of diluted earning per share is below:

 

Diluted EPS = Profit after interest, tax and preference dividend / (Weighted average shares outstanding + Convertible shares)

 

To calculate weighted average shares for basic or diluted EPS, let’s take an example. If a company, Zakoota LLC, had outstanding shares at the beginning of the year (1 January) of 10,000 until mid of the year, i.e., 30 June. Then, the company issued additional 15,000 shares and at the end of the year (31 December) there were a total of 25,000 shares outstanding. Now, how to calculate weighted average shares for EPS calculation?

 

Weighted Average shares = (10,000 * 6 / 12) + (25000 * 6 / 12) = 17,500

 

Final words

EPS is widely used in financial analysis and for investment decision purposes. It is easy to understand, easy to calculate and easy to comprehend. We can also compare EPS across different companies as well as various industries. It is especially relevant for the prospective shareholders as it is directly related to the earning of the shareholders. However, it is essential to understand that directors may not distribute all earnings of the company among shareholders immediately. Therefore, an investor should not expect to receive calculated EPS as a dividend. It depends upon the directors of the company how much dividend they want to distribute among shareholders.[/vc_column_text][/vc_column][/vc_row]

Categories
Investment Management Ratio analysis

Dividend Per Share

[vc_row][vc_column][vc_column_text]Dividend per share is a measure for the company’s financial performance. Corporate world widely uses this ratio for financial analysis purposes. It directly affects shareholders, and therefore it is a common question among shareholders and in their minds. How much is the dividend per share in my company? Or How much is the dividend per share in a prospective company?

Let’s first look at the simple formula of dividend per share:

 

Dividend per share = Dividend for the common stockholders / Number of shares outstanding

 

Let’s say that if the company announced a total dividend of $25,000 and the total number of common stock shares is 5,000 shares, then it means that for each share there is a dividend of $5 ($ 25,000 / 5,000 shares).

Shareholders prefer to receive a higher dividend payout. However, a higher dividend payout ratio is not a good indicator to measure the financial performance of a company. Sometimes, directors of a company may announce a higher dividend to keep shareholders happy and to conceal poor performance of the company. Better measures of the company’s performance are earnings per share and price-earnings ratio.

In contrast, sometimes, directors want to utilize the earnings of the company for future projects. In such cases, they would announce a lower dividend per share. This approach may not be welcomed by shareholders of the company, but it might be better for the company’s future as well as shareholders’ future. The more money kept in the company’s reserves and utilized wisely in future; the better would be the financial performance and financial position of the company.[/vc_column_text][/vc_column][/vc_row]