Understanding on Stock Split Exercise

By Stella Goh – Market Data Analyst | 12 December 2018

A stock split is common in nowadays stock market and some of the successful companies will exercise stock split multiple times throughout a decade. But, what does stock split means for the company and the shareholders? If you are holdings a stock which is going to split, don’t worry. We will discuss this topic for you to have a better understanding.

It is a corporate action declared by the board of the company with the purpose to increase their number of total share of a company by splitting each of the shares. When it happens, the share price drops proportionally due to the result that each of the shareholders will own more shares with the same proportion of ownership in the company.

How Does It Impact The Share Values?

Let us look at 1 of the example. If the company has 10,000,000 issued share priced at RM50 per share before share split, it will have a market capitalisation of RM 500,000,000 (10,000,000 x RM50). If the share split occurred at 2-for-1, the total company number of shares would double to 20,000,000 shares. The price for each of the share to be adjusted to RM25. (RM50,000,000 / 20,000,000). For example,  a shareholder with 1000 shares finally will have 2000 shares in total, but the value remains the same.

Based on the example above, it is also clearly indicated that there is no change in the total value of shares. The cost of a single stock will become cheaper, and only the total number of stock in the market will increase.

Why does Stock Split happen?

Stock splits occurred when the company management wishes to add liquidity of their stock by diluting it to reduce the cost per share to the reasonable price level. When the stock price has become less expensive, it may attract more new investors to invest in their company even though the underlying values of the company do not change.

Besides, a company that is practising a share split also can indicate a good signal that the company is doing well enough and investors will assume that the company will lead the share price to go higher in future.

Are Share Split Good For Investors?

When there is stock split occurred, it does not mean that the company will continue to do well in the future. The company split its stock when the share price has risen enough, but it does not indicate that the share price of a company will continue to grow in the future. Investors must always remember that when they owned more shares for the stock split, the overall value of their holdings will remain the same.

Some of the investors may say that stock split is a company doing well in their business and it may consider as a buy signal. It is not correct in this statement. Investors should always look at the whole picture of the company before making an investment decision. Investors can use stock split as an indicator, but further market evaluation is needed.

Should You Buy A Stock Before or After Stock Split?             

For the investors who will invest for long-term, it does not matter whether he/she buys the stock before or after the stock split. Let’s us look at scenarios as an example.  Let’s say I could purchase 1000 shares of a company which is trading at RM0.50 today, or I could purchase 2000 shares of the company at RM0.25 tomorrow after a split, the outcome will be identical. The only thing that can vary from the day before or after the split is the actual price of the shares.

Conclusion

Investors need to be methodical when they are trying to purchase the stocks before or after the split announcement. The stock split is a good thing for small investors who seek good company within their affordability. However, investors are not advisable to directly buy the shares before or after the split without doing further research.

Importance of quarterly report to an investor

By Evelyn Yong | 7 December 2018

The quarterly report is a financial update by the public listed company on a quarterly basis to the public investors. Financial analysts put lots of focus in this report because it can affect the price movements of the stocks in the short term. There are several criteria cannot be ignored in the quarterly report as below.

EPS

Earnings per share (EPS) serve as an indicator of the profitability for a company. This measurement shows the indication of the company’s ability to generate, sustain and grow its profits. The higher the net profit, the higher the EPS (unless bonus issue or right issue occurred). The quarterly adjusted EPS can reveal the latest financial profitability and have a better understanding of business performance. The performance can be measured based on whether the EPS meets, misses or beats analysts’ predictions and will have a substantial impact on the short-term share price.

Sales and Earnings growth

Invest in a business is a long-term activity, so Investors tend to invest in good prospects company. Hence, stocks that can consistently grow their sales and earnings are expected to perform well in the long term. However, it is difficult for companies to outperform analyst expectation every quarter due to the short time unstable economic situation or political news. Therefore, for stocks that perform well in each quarter, they are usually the industry-leading stocks due to their ability to boost sales while controlling costs and expenses to ensure the earnings growth.

Cyclical Trend

For some industries like food and beverages industry, it has cyclical sales performance due to peak seasons like festive season and low season. Comparisons quarter by quarter may not accurately determine an overall business performance, so investor shall include past few years quarterly results into their analysis to understand the peak and off-season conditions. Then, they may get more ideas at the timing of entering or exiting the market.

Cash Flow

Stable cash flow is essential for a company to ensure its financial liquidity. When a company can generate high positive cash flows, this will create more value for shareholders and enables the company to expand their business, pay a special dividend for shareholders, repay debts and cushion future financial challenges. A profitable company can fail if the operating activities do not generate enough cash to maintain liquidity. If the company fails to convert sales into cash on time, their cash liquidity will lead to a cash flow shortage and affecting day to day operations.

Company’s Planning and Actions

The management always interprets the quarterly performance and discloses further plans in the quarterly result or in a press release. This is generally the moment investors will form their perception towards how effective and efficient the company overcome current obstacles and future challenges. More often than not, sharing related previous success stories of how issues and crisis were managed are able to display the company’s commitments towards the interests of its shareholders. On top of that, it also provides investors with clarity and to a certain extent, assurance, on the direction and dynamism of the company they have invested in.

Conclusion

Although the quarterly report is not audited, it is still essential for investors to make any decisions, as the annual report is only published once a year and many variables may occur within 12 months. To keep their investment safe, investors should not skip the company’s financial reports and protect your assets. Investors should not judge a company by just looking at one of the criteria because a good company will not be only good in one aspect. Instead, they should consider more aspects before making a decision.