Equity Dilution, though reduces ROE(%), but it acts as Networth Booster. Also improves Debt to Equity

Equity Dilution, though reduces ROE(%), but it acts as Networth Booster. Also improves Debt to Equity.

Company’s networth generally remains lower than its market cap. So, we see Price to book value numbers as 2-4 kind of.

However, when a company issues new shares, it issue them at price close to market price and not at book value.

So, it can possibly happen that when a company dilute its stake by 15% and but its networth post dilution increased by 100%. (check Havell’s dilution in 2007-09 which is similar of that kind of).

Below is an numeric illustration to understand impact on ROE(%) and Increase in Old shareholder’s netwoth.

dilution_roe_networth

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