Share valuation, I did it my way - Part 1

Back to the basics
When a company starts up, it needs capital to commence its business. It issues certificates known as "shares" to those people who are willing to fork out the money to start the business. In exchange, the people who paid for the shares will be known as "shareholders" of the company and they will be entitled to a portion of any profits or assets of the business, according to the percentage of shares he/she holds, or known as "part ownership". These shares will also give the owners voting rights during shareholders' meetings, as per the percentage of shares held. Fair and square.

So, as the business grows, the business will need more money to expand, like buying new machines, employing more manpower, carrying more inventory and etc. It has a few ways in getting the new fund and one of it is by issuing more shares in the company (hence, increasing the share capital). The company can either sell the new shares to existing shareholders (right issues), to new shareholders (placement) or by converting reserves fund, such as retained profit (bonus issues) into equity. Until a certain stage, when the company fulfill a certain requirement, it can opt for listing, which we call Initial Public Offering (IPO). This is by offering the shares of the company to the public. Ahhh..... this is when small timers like us have a chance to have a share on the good and bad times of the company. Well, practically, as most of our holdings are too small, what we can share are really limited. For example, as a minority shareholder, we can't use the company's car, we can't use the company's private jet, we can't fly in first class in the company's expense, we can't stay in big hotel suits with girl friends in the company's expense, we can't spend tens of thousands ringgit per night to entertain customers in the company's expense, we can't go shopping for a million ringgit paintings in the company's expense and the list goes on.. sounds familiar? you know I am not so creative in making these up, don't you?

Anyway, as a shareholder, one is entitled to a portion of assets and profits of the company, and of course, liability and losses as well. If one were to be given a choice, would he/she opts for profits or losses? assets or liabilities? Profits and assets of course, you say? nah.. certainly not everyone is as rationale thinking as you are. Haven't you seen someone chasing after companies that made heavy losses for a few consecutive years and are on the verge of bankruptcy before? How would you explain that?

Well, as a investor, logically, I prefer companies that I have a share in to be profitable, to have good management, to continually grow its business and good stuff like that, which will ultimately increase the value of my investment. Don't you? Well, naive I may be, but please tell me, if you don't analyse a share or a part ownership of a company based on its value, what the heck should your analysis based on?