How To Spot Companies Which Are Likely To Issue Bonus Issue

Published by slang April 26th, 2007 in Articles

For readers to have a fuller understanding of the mechanism of bonus issue, please go through all the other articles in this blog:

In earlier articles in this blog, I have also mentioned about the ways to spot undervaluation. To add on, this article seeks to explain how we can use the financial statements in the annual reports to spot Companies that might need to do Bonus Issue.:

Illustration: Balance Sheet Of ABC Ltd

	$’000
PROPERTY, PLANT & EQUIPMENT	2,700
CURRENT ASSETS
Inventories	2,300
Trade Receivables	1,300
Other Receivables, deposits & prepayment	500
Tax recoverable	1,500
Cash in Hand & At Bank	900
	6,500
Less: CURRENT LIABILITIES
Trade Payables	650
Other Payables & accruals	3,000
Provision for Taxation	50
	3,700
NET CURRENT ASSETS	2,800

Represented by:
SHARE CAPITAL	200
RETAINED PROFIT	2,600
	2,800

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

Share capital looks small/UNDERCAPITALIZED

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 )

Annual sales/turnovers have also been increasing where cash needs to be conserved to buy additional fixed assets or finance the working capital.

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

In the final finale, we see that the above scenarios pose good chances for a company to issue Bonus Issue. By doing so, this is merely a bookkeeping entry which is 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.

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1 All Topics Under The Heading Of Financial Accounting Ratio Analysis Or The Interpretation Of Financial Statements In The Annual Report | FMAccounting Pingback on Mar 13th, 2008 at 2:30 am

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