How does Stock Market affect a company’s balance sheet?
So I know once a publicly-traded-company issues stock, the stock is basically out of its hands, and any future price changes in the stock will not be recorded in the company’s accounting records. So when a stock lowers in value, will that in any way directly affect the company’s financials?
Good answers from Everyone!
it can indirectly affect the company, if they’re looking to make a secondary offering, or if they’re buying back shares.
but there is no direct, inherent link between the market price of the firm’s equity, and their financial statements.
The market value of shares (the price paid on an exchange) will not effect the balance sheet of a company. If that was the case, the balance sheet would be just as volatile as the stock market, scaring away investors.
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Jeff Hall from http://www.overflowcafe.com
Yes it does, It effects the gearing ratios and the ability to raise more capital. If your company stock is worth $10 per share and you have 7m shares authorized then the Equity capital is $70m. If you have $30m of debt then your debt to equity ratio is 70:30. If the stock price falls to $5 per share then your equity is only worth $35m and suddenly your ratio is 58:42.
There are two main reasons why this is important, the first is that most debt has covenants attached. These could be anything from your interest payments have to be less that 10% of your operating profit to your equity to debt ratio must be over 60:40. As you can see in our example above the company would have breached its covenants, effectively defaulting on its bonds.
The second and most important reason is ability to raise more capital. If a bank for example, has had to write down some losses it requires more capital to keep it’s self going. It has two real choices, take on extra debt by issuing bonds; or do an equity capital raising. The downside to bonds is that you have to pay for them in interest and eventually pay them back or roll them over. For an equity capital raising on the company above if you wished to raise $7m at $10per share you would have to dilute the shareholders by about 9%. If the stock price was $5 then the shareholders would be diluted by 19%! much more dilution will force the price of shares down further. This can be taken to extremes if the share price is $1 and your company tries to raise $7 then that is the entire value of the company and your company is going down the pan.
This example was brought to you by Lehman Brothers, Bear Stearns, Washington Mutual and Merrill Lynch.
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it can indirectly affect the company, if they’re looking to make a secondary offering, or if they’re buying back shares.
but there is no direct, inherent link between the market price of the firm’s equity, and their financial statements.
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It doesnt. Its the other way around. The quality of the balance sheet affects the stock price.
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