rainmaker & mono

Rainmaker & mono

I feel it's mono who is coming as rainmaker. We have had quite nice forum with mono who went off in last year. I too had a long pause.

salt wrote:Rainmaker & mono

I feel it's mono who is coming as rainmaker. We have had quite nice forum with mono who went off in last year. I too had a long pause.

I also feel it's pepper who is coming as salt.

So did this mono also use out dated books and confuse retained earnings for Net Assets?

Jiggysaurus wrote:

salt wrote:Rainmaker & mono

I feel it's mono who is coming as rainmaker. We have had quite nice forum with mono who went off in last year. I too had a long pause.

I also feel it's pepper who is coming as salt.

So did this mono also use out dated books and confuse retained earnings for Net Assets?

Mono skills were at trading and identifying patterns . He does not go into indepth details as Rainmakers tries to.

Mono is a person with large capital and need volume and a sure moving market to make money. He will return when a signal of true bull starts.

That my observation.



Jiggy @ your comment

salt wrote:Rainmaker & mono

I feel it's mono who is coming as rainmaker. We have had quite nice forum with mono who went off in last year. I too had a long pause.

Jiggysaurus wrote:

salt wrote:Rainmaker & mono

I feel it's mono who is coming as rainmaker. We have had quite nice forum with mono who went off in last year. I too had a long pause.

I also feel it's pepper who is coming as salt.

So did this mono also use out dated books and confuse retained earnings for Net Assets?

Not Mono - I thought he went to US ... not 100% sure who he was in real life though. I noticed the quality of the forum has been going down over the past few months .... very little comment and analysis

@Jiggy I would suggest you not use NAV since it contains the stated capital. Instead look at retained earnings and market cap to get a better idea.

Stated capital can only be increased with an increase in shares (rights, scrip issue, capitalisation of reserves). It can be decreased with a cancellation of shares. Hence it is very unlikely to occur in most stocks ....... definitely not to pay dividends.

rainmaker wrote:

@Jiggy I would suggest you not use NAV since it contains the stated capital. Instead look at retained earnings and market cap to get a better idea.

Stated capital can only be increased with an increase in shares (rights, scrip issue, capitalisation of reserves). It can be decreased with a cancellation of shares. Hence it is very unlikely to occur in most stocks ....... definitely not to pay dividends.

Great, something to discuss.

In theory stated capital does belong to the shareholders (eventually in a liquidation) so it should be included in any measure that compares against market cap. (by comparing ONLY retained earnings against market cap you are excluding capital reseves as well as stated capital).

For banks and insurance companies, the stated capital is used to protect customers.

Yes you are correct that the AOCI (unrealised gains/loss) and revaluation reserves are kept in the equity side. But a very good indication of a strong company is a high ratio of retained earnings/market cap. Dividends come from profits + retained earnings (ie cash)

Stated capital may belong to shareholders, but it will never be reduced in a going concern.

May I also add that all the best returns in the CSE have followed the above rule (if you look at the return over a 5 year period) ... Carsons, BUKI, Goodhope, CINS, DIMO, LOLC

In fact CINS had retained earnings of 6 Billion at one time with a market cap of 3 Billion.

rainmaker wrote:
Stated capital may belong to shareholders, but it will never be reduced in a going concern.

Well that's the thing by disregarding stuff that does belong to shareholders, you will miss out on opportunities that come along.

Here's an example that i'd rather keep to myself but i'm sure nobody will understand.

Lee Hedges (which is arguably not a going concern) has Revenue Reserves of 1.6 billion so using your method we get a market cap to xxx of 0.8 but if we include stuff that does belong to shareholders we get 2.2 billion (Revenue reserves+ Stated Capital+ Cap Reserves). That gives a calc of market cap to xxx of 0.6.

There's a big difference between a ratio of 0.6 and 0.8, so it's always simplest to compute shareholder ratios by adding everything that belong to the shareholder/investor.

Ofcourse there will be examples that break the above rule. It's a general rule that is used to prevent one from getting stuck with a firm like DIAL (28 B in Stated Capital). DIAL NAV is what is justifying the price.

As per the value of real estate, it is a decision that has to be made by the management in accordance with SLAS. Remember big real estate has been notorious in lanka. One CEO told me that what is the point of builiding a large block in fort, no one can buy it from you in times of trouble. .... (HNB take note)........ Ceylinco House was another example despite the value and publicity to dispose it.

For minority shareholders, you should not add this premium to the stock. The premium is only for controlling shareholders.

Rainmaker

I am not an Accountant but know a little bit about balance sheets. When you say NAV includes capital side items such as stated capital, it confuses me as NAV is an asset side cal.

All what I heard is that NAV is a good indicater of the strength of BF&I sector shares.

?Can you clarify this.

After looking at NAV/PE , looking at retained earning ratio is good.

But retained earning does not give a complete picture of the company's future growth.


Jiggy,

interesting share you brought up ;-)

As a rule, I don't look at NAV which has no use in relation to fair value those assets unless it is represented by readily marketable assets like banks & FIs.

Further, I don't think banks capital is for customers ( liquidity), its for shareholders (solvency): both are important for both

anyway I don't understand the whole argument. but , this forum should be like this instead of saying this will go this week , that will pass that mark buy Friday.....etc

rainmaker wrote:For banks and insurance companies, the stated capital is used to protect customers.

Yes you are correct that the AOCI (unrealised gains/loss) and revaluation reserves are kept in the equity side. But a very good indication of a strong company is a high ratio of retained earnings/market cap. Dividends come from profits + retained earnings (ie cash)

Stated capital may belong to shareholders, but it will never be reduced in a going concern.

@ Rainmaker - Do you mean to say that Retained Earnings (i.e. Revenue Reserves) is always Cash on the Equity side of a Company's Balance Sheet ? and that a healthy Revenue Reserve will ensure a good Dividend Potential ? Can you please clarrify what point you are trying to make because it is a bit unclear from above points in this thread. thanks.

When profits are made they are transferred to the equity side of the balance sheet called retained earnings. The company may have to transfer some of this share holder profit to stated capital as CB rules .... In this case you capitalisation of reserves. All stated capital is backed by shares. Proceeds from IPO go to stated capital. Stated capital is used to protect the customer from a shock impact or to provide a capital cushion if a large loss is materialised. In this case stated capital is reduced and shares are cancelled.

Not all retained earnings are cash but you will never reduce stated capital to pay dividends. So dividends are paid from profits during the period and retained earnings. You cannot use revaluation reserves or unrealised gains to pay dividends because they are not booked gains.

So firms like TFC kept increasing their land values to have strong NAV becos they know the CSE way of thinking. A lot of those revaluation reserves were written off..... When you write off assets you must post it to P&L as a realised loss.

@ haputantri NAV is equity divided by total number of shares. Equity includes all possible profits from unrealised share gains, bonds, land plus accumulated profits and the capital that shareholders invested to begin and throughout with the company aka stated capital.

When you start a company like XYZ bank you need to put some money in. That is stated capital. You use that to acquire assets and losses go to retained losses. Then you have to offset losses by getting more money ... Rights. This increases your stated capital.

Then you make more losses so now you cannot raise money. So you offset all the losses by reducing stated capital. When you do this your shares are cancelled in proportion. Have you seen disclosure about reduction in stated capital?

Very rare but i have seen it. After you have less stated capital your customers are not secure because the next major loss wipes out all the equity.

So CB and other banks you borrow from get upset. They ask for a major capital injection and you talk about your land value. CB tells you off put some cash. So the big cash guy comes (if comes) and says I want a 95% stake because I'm bailing you out .... Like JP Morgan Merrill Lynch deal.

very interesting discussion

you can refresh your knowledge

What is in a name Mono or Rainmaker,Salt or pepper

Rainmaker,

Give some examples of companies recently that did " shares cancelled in proportion" after reduction in stated capital. If they do that is is serous.

I remember for example SEMB did a reduction of stated capital but they did no such thing to cancel shares. If they did that seriously affect holders.

slstock wrote:Rainmaker,

Give some examples of companies recently that did " shares cancelled in proportion" after reduction in stated capital. If they do that is is serous.

I remember for example SEMB did a reduction of stated capital but they did no such thing to cancel shares. If they did that seriously affect holders.

Sometime back MBSL also did the capital reduction, but am not sure what method they followed.

@slstock ..... there are two options available to a company as per section 59 of Companies Act. Cancel shares or accept a lower par value per share. Senanayake opted the second option but the share price drops with the second option.

With the first option the share price does not drop. Because the NAV is the same before and after. You cancel both equity (stated capital) and shares


From the web-----

http://www.wikinvest.com/stock/Peace_Arch_Entertainment_Group_%28PAE%29/Reduction_Stated_Capital


REDUCTION IN STATED CAPITAL

Section 34(1)(b)(ii) of the OBCA permits a corporation to reduce its stated capital in a share capital account for any purpose. The reduction in stated capital will be applied to reduce the deficit in the Company’s financial statements. The Corporation has accumulated a large deficit over the past few years, and the Directors have determined that it is in the best interests of the Corporation to reduce its stated capital account for the common shares, which will, reduce the need to carry forward and account for the deficit in the Company’s financial statements. This reduction in the stated capital account is being made in accordance with generally accepted accounting principals in the US and Canada. Holders of common shares the Corporation will be asked to consider and approve at the Special Meeting the Special Resolution as set out in Appendix B to this Circular (requiring approval by a majority of not less than two-thirds of the votes cast by shareholders who vote, in person or by proxy, on the special resolution) to authorize the directors to reduce the Corporation’s stated capital account for its common shares by up to $29,706,623, or such lesser amount as may be determined by the directors of the Company, which represents all or a portion of the accumulated deficit of the Corporation at September 1, 2004.

rainmaker wrote:@slstock ..... there are two options available to a company as per section 59 of Companies Act. Cancel shares or accept a lower par value per share. Senanayake opted the second option but the share price drops with the second option.

Once again the book may be slightly outdated.

SEMB and CSEC reduced stated capital by writing off stated capital against retained losses. I'm not an expert on companies act but the new Companies Act obviously seems to allow SEMB/CSEC to reduce stated capital without reducing issued shares.

Yes but what company in Sri Lanka cancelled shares. That is serious to the holder. Thats why I am asking for an example. If this does not happen now then we do not have to worry people about loosing partly shares they hold during a reduction of stated capital.

rainmaker wrote:@slstock ..... there are two options available to a company as per section 59 of Companies Act. Cancel shares or accept a lower par value per share. Senanayake opted the second option but the share price drops with the second option.

With the first option the share price does not drop. Because the NAV is the same before and after. You cancel both equity (stated capital) and shares


From the web-----

http://www.wikinvest.com/stock/Peace_Arch_Entertainment_Group_%28PAE%29/Reduction_Stated_Capital


REDUCTION IN STATED CAPITAL

Section 34(1)(b)(ii) of the OBCA permits a corporation to reduce its stated capital in a share capital account for any purpose. The reduction in stated capital will be applied to reduce the deficit in the Company’s financial statements. The Corporation has accumulated a large deficit over the past few years, and the Directors have determined that it is in the best interests of the Corporation to reduce its stated capital account for the common shares, which will, reduce the need to carry forward and account for the deficit in the Company’s financial statements. This reduction in the stated capital account is being made in accordance with generally accepted accounting principals in the US and Canada. Holders of common shares the Corporation will be asked to consider and approve at the Special Meeting the Special Resolution as set out in Appendix B to this Circular (requiring approval by a majority of not less than two-thirds of the votes cast by shareholders who vote, in person or by proxy, on the special resolution) to authorize the directors to reduce the Corporation’s stated capital account for its common shares by up to $29,706,623, or such lesser amount as may be determined by the directors of the Company, which represents all or a portion of the accumulated deficit of the Corporation at September 1, 2004.

rainmaker wrote:When profits are made they are transferred to the equity side of the balance sheet called retained earnings. Profits are also simultaneously transferred to Cash in the Current Asset side of the Balance Sheet. The company may have to transfer some of this share holder profit to stated capital as CB rules. Under Statutory Reserves .... In this case you capitalisation of reserves. Generally Capitalization of Reserves is always from Capital Reserves that comes about from Revaluing Fixed Assets in non banking companies. i'm not sure about the BFI Sector . All stated capital is backed by shares. Proceeds from IPO go to stated capital. Stated capital is used to protect the customer from a shock impact or to provide a capital cushion if a large loss is materialised. In this case stated capital is reduced and shares are cancelled. If this happens how is a customer or shareholder protected ?

Not all retained earnings are cash but you will never reduce stated capital to pay dividends. So dividends are paid from profits during the period and retained earnings. The Amount of Dividends you pay is always a function of your Profitability and more importantly your Cash Flow which takes into account Capex. Retained Earnings or Revenue Reserves is never an indication of ability to pay Dividends. Retained Earnings is a score sheet of Earnings less Dividends throughout the history of the Company. A carried forward Loss will mean a Negative Revenue Reserve. You cannot use revaluation reserves or unrealised gains to pay dividends because they are not booked gains. So firms like TFC kept increasing their land values to have strong NAV becos they know the CSE way of thinking. A lot of those revaluation reserves were written off..... When you write off assets you must post it to P&L as a realised loss.

The New Accounting Rules which are Internationally accepted and followed state that you have to Mark To Market the Fair Value of All your Assets and Liabilities. Then a realistic NAV is arrived at. Now, if some Banks/ Companies take advantage of this by revaluing their assets to unrealistic levels to boost their equity, this does not mean that the NAV is not a useful ratio to figure out the Net Worth of a Company/ Bank.

Was Galadari Hotels thinking in those terms ?(cancellation of shares)

@Jiggy None of the above is outdated. If you use stated capital without cancelling shares you will reduce the Net Asset Value per share. This will affect the share price which is what it did. ..... Note that there were some eyebrows raised when Senanayake did this and Senthi (the major shareholder) agreed to this.


The most common option is to offset losses by reducing stated capital and cancelling shares.

And yes Galadari thought about this at one time instead of doing debt to equity swap.


@Alchemist, Stated Capital cannot be used to pay dividends. Fair value rules only impact the revaluation reserves (unrealised gains/losses). The point of the first post was in response to Jiggy questioning why I was referring the retained earnings instead of NAV. Both are important, but Retained Earnings is a good rule of thumb. I notice that some members quote NAV per share instead of questioning what it is composed of.

There is no point arguing which is more important. But for those who think stated capital can be used to pay dividends, you are wrong.

Let's now move onto something else