User:Abhishek t30/sandbox

Share-split, bonus-share, how well do we understand these tools?
--Abhishek t30 (talk) 09:13, 15 February 2012 (UTC)

Many of us have witnessed number of share splits and bonus share given in the past. But many wonder, why a company decides to go for such themes. Before we go further, first we must be aware of the terms associated with the share split for instance traded volume, market cap, share price etc. which are somewhat inter-related to each other ultimately impacting the market and company’s Business valuation.

There is a myth that a split can help in raising the share price but share price is conceptually related more to the investors which in turn dependent on fundamentals of a Company. The perceived value of a Business to the Investor community is an important indicator of Business valuation. Market Capitalization, thus is fast becoming a universally accepted indicator of Business Valuation.

A share split, changes the face value of the stock, share. Only the number of shares outstanding change, so a stock split does not directly change the value or net assets of a company, which helps to increases the volume of the share traded.

'' How things happen? ''

Well, If you did not understand the above lines, then I must tell you with a simple example, like you have the share of Rs. 100 with a face value of Rs 10 and average traded volume in the market is 100. Let’s suppose, this is the costly price and many of the retail investors are not able to buy such share of high price. So company splits the share in some ratios for eg. From face value of Rs. 10 to Re 1, now a Share of Rs 100 becomes of Rs 10, and this amount is so attractive for small investors, they try to buy such shares at cheaper rates & obviously the volume will increase, in investors increase (if they find this stock attractive to them).

But that doesn’t mean, it will increase the market cap too.

Market Capitalization or market Cap is nothing but the No. Of Shares times the Market Price of Shares, which theoretically suggests, Market Cap shall go up, if either of the above parameters increases. However, increase in share capital does not necessarily increase market cap, due to negative impact on EPS, which governs market price. Hence, the focus shall be directed towards increasing the market price of shares through improved and sustainable performance level. Above example explained us how a split can attract investors thus help in increasing liquidity in the firm, But with an intention to increase the share price with help of split is not a best way to help the firm to have greater market cap.

Share price is determined by Earnings per share (EPS) multiplied by Market Price Earning Multiple (PE). Strategy must be made driven for both. PE multiple, a complex factor as told earlier is based on, perceived outlook by the investors on an Industry segment and specific strengths of a company. In short the factors that govern PE, are high consistent growth, increased margin compared to its peers, emerging business segment participation, effective ocean expansion strategy, communicating company’s future plans and transparent and good governance. This is an area where CEO and CFO needs to focus on to have a strong corporation with strong values and determination which can be evident by its results (performance) that can wave out the positive news in the market.

Further…

EPS is determined by dividing Post tax Profit (PAT) by no. of equity shares. Strategy shall be to improve PAT and optimize share capital. Resorting to additional share issue shall reduce EPS and hence have negative impact on Market Cap, unless additional fresh equity is utilized for growth thus generating additional revenue and profit optimizing gearing and efficiency. Otherwise indiscriminate infusion of equity shall have negative impact on EPS and Market Cap.

PAT is a determinant of operating profit (EBIDTA) less interest, tax and depreciation. While improving asset productivity shall optimize depreciation, effective tax planning shall also help to reduce tax burden thus increase PAT. Interest charge can be optimized by reducing working capital cycle, effective receivables and inventory management. Interest rate also can be minimized by having proper credit rating and right borrowing mix.

Increasing EBIDTA is one of the prime important factors in increasing EPS and Market cap while controlling its financial costs. However there are other expenditures that a Company must focus on to reduce them in a proper way.

Apart from all these technical factors, a company should also rely on corporate social responsibilities & Public relations management concerning about its external customer and internal employees. So it is clear that share split has very less relevancy in improving the market cap. Nevertheless, it is one of the way complementing with other technical factors described above would yield better result.

A responsible and strong management with constant Endeavor towards enhancement and encompassing of its business may render greater market cap thus giving greater sustainable value to the business.