How To Spot Companies Which Are Likely To Issue Bonus Issue

Illustration: Balance Sheet Of ABC Ltd

If you look at the above sample Balance Sheet, the following should catch your attention:

1.  Share capital looks small/UNDERCAPITALIZED
2.  Cash in Hand and At Bank is very much smaller than the figure shown in the Retained Profit row. What it means is that the money had been already being invested in some major expenditure namely Property, Plant and Equipment ( $2,700 )
3.   Annual sales/turnovers have also been increasing where cash needs to be conserved to buy additional fixed assets or finance the working capital.
4.   Furthermore, as the share capital is so small that in the Notes to the Financial Statement both Earning per share and Dividend per share/Dividend Yield will not show a true realistic % which is not comparable to other companies in the same industries. This can cause grave distortion to analysts and the public investors

From the above scenarios, they posed good opportunities for a company to issue Bonus Issue which is a simple bookkeeping entry exercise re: the Transferring from Retained Profits to Share Capital rows ( Debit Retained Profits Credit Share Capital).

The first main objective of this transfer or technically called “capitalization of reserves” is to “freeze the reserves that investors/outsiders might otherwise think that can be distributed to them in terms of dividend. ( actually there are no enough cash to distribute as most of the profit/ money were used to buy Fixed Assets)

Secondly, the main objective is to align all the Earning per share and Dividend per share/Dividend yield into their correct perspectives.