Before putting money on a share, investors are advised to look at the company, business, balance sheet etc. One more parameter they should consider is equity dilution, says Execution Noble, an investment bank.
Over the past five years, the BSE-100 companies that have given the highest growth in earnings per share include Bharti Airtel, Cipla, MRF, Crompton Greaves and ACC. A common feature across these firms is that none of them have gone for big ticket equity fund raising. The lesson seems to be that the best companies to invest, other things being equal, are the ones with lowest dilution. Dilution stands for the number of new shares issued by the company’s management – through tools such as convertible debt, follow on issue or qualified institutional placements.
Investors tend to frown on a management that raises equity frequently. This is because equity is the most expensive — and risky form of funds. Also, frequent fund raising indicates that the business is not generating the cash it needs. Dilution means a larger number of shares having a claim on the company’s assets — and therefore a drop in what an individual shareholder is going to get.
In the past three year period, growth in EPS – or earnings per share – of top companies has been much lower than GDP growth, says Execution Noble. Over a five year period, EPS growth still trails GDP growth as well. Three years may not be the best measure in this case, because the world economy is just coming out of a bad recession that hit earnings. Also, this period saw many companies issue fresh shares as other sources of fund raising were locked out.