Navigating the Impact of New Share Issues on Capital Structure and Growth Prospects

As investors, we're constantly on the lookout for companies that can generate sustainable growth and deliver attractive returns. One aspect of a company's capital structure that can significantly impact its growth prospects is the issuance of new shares. In this article, we'll explore how the issuance of new shares can affect a company's capital structure, earnings per share (EPS), return on equity (ROE), liquidity, and marketability.



Capital Structure and Future Growth Prospects

When a company issues new shares, it dilutes the ownership of existing shareholders. This dilution can lead to a decrease in their proportional ownership and voting rights. However, the issuance of new shares can also provide the company with additional capital to invest in growth opportunities, such as expanding operations, acquiring new businesses, or developing new products/services.

For instance, Northern Venture Trust PLC issued 877,021 new ordinary shares, raising approximately £511,500 (877,021 shares * 58.3p). This capital can be used to fund the company's growth initiatives. Similarly, Octopus AIM VCT plc issued 2,022,911 new ordinary shares, raising around £1,060,000 (2,022,911 shares * 52.3p), which can be invested in the company's growth prospects.

Earnings per Share (EPS) and Return on Equity (ROE)

The issuance of new shares can potentially impact a company's EPS and ROE. When a company issues new shares, the number of outstanding shares increases, which can dilute the EPS. Assuming the earnings remain constant, the EPS would decrease due to the increased number of shares. For example, if a company's earnings were £10 million before the issuance, and the number of shares was 198,517,472, the EPS would be £0.05 per share. After the issuance, the number of shares becomes 199,394,493. If the earnings remain the same, the new EPS would be £0.05 * (198,517,472 / 199,394,493) ≈ £0.0499 per share, a slight decrease.

Similarly, the issuance of new shares can decrease the ROE, as the shareholder's equity increases. Assuming the earnings remain constant, the ROE would decrease due to the increased shareholder's equity. For instance, if a company's earnings were £10 million before the issuance, and the shareholder's equity was £50 million, the ROE would be 20%. After the issuance, assuming the shareholder's equity increases by the value of the new shares (at the subscription price of £0.583 per share), the new shareholder's equity would be £50 million + (877,021 * £0.583) ≈ £54.7 million. If the earnings remain the same, the new ROE would be £10 million / £54.7 million ≈ 18.26%, a slight decrease.



Liquidity and Marketability

The admission of new shares to trading can affect the liquidity and marketability of a company's stock. When new shares are admitted to trading, the number of shares available for public trading (float) increases, making the stock more liquid. For example, in the case of ZOO Digital Group PLC, the admission of 375,000 new Ordinary Shares increased the total number of Ordinary Shares in issue from 98,318,228 to 98,693,228, making the stock more liquid.

However, while increased float can improve liquidity, it can also lead to dilution if the new shares are issued at a lower price than the existing shares. Dilution can make the stock less attractive to investors, potentially reducing its marketability. In the case of Northern Venture Trust PLC, the subscription price of 58.3p per share was higher than the market price at the time, which could indicate that the new shares were not dilutive.

The admission of new shares to trading can also increase the visibility of the company's stock, making it more marketable. This is because more investors may become aware of the company and its stock, leading to increased trading activity. For instance, the admission of new shares to the Official List of the FCA and trading on the London Stock Exchange's market for listed securities can increase the visibility of the company's stock.



In conclusion, the issuance of new shares can impact a company's capital structure, EPS, ROE, liquidity, and marketability. While the issuance of new shares can provide the company with additional capital to invest in growth opportunities, it can also lead to dilution and potentially decrease the EPS and ROE. The admission of new shares to trading can increase the liquidity and visibility of the company's stock, making it more marketable. However, the specific impact will depend on various factors, including the number of new shares issued, the price at which they are issued, and market conditions. As investors, it's essential to carefully consider these factors when evaluating the potential impact of new share issues on a company's growth prospects and overall investment appeal.