This Share Shows How Your Investment Dollars Can Be Destroyed

Editor’s Note: This article had made a mistake with the date of the announcement of the rights issue. The mistake has since been corrected. The Fool regrets the error.

Earlier today Yesterday, frozen fish supplier Pacific Andes Resources Development Ltd (SGX: P11) had proposed a rights issue which would see it raise up to S$192.3 million after deduction of estimated expenses.

The market didn’t take too well to the company’s move as shares of the fishing outfit slid by 26% on the day of the announcement, followed by a further 5.00% drop to S$0.076 today. In contrast, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), had inched up by just 0.03% to 3,346 points today.

If history is to be used as a guide, there’re good reasons for the market to be wary of the company’s latest capital raising exercise.

The last time Pacific Andes announced a rights issue was on 6 March 2012 and the company had a market capitalisation of S$734.6 million that day. The rights issue saw the company raise some S$223.6 million from shareholders but sadly, all that extra capital seems to have gone down the drain. As of today, the fishing outfit’s market capitalisation has been slashed by almost half to just S$383.3 million.

Of course, public-listed companies by and large can’t control how their share prices move; even companies with strong business fundamentals can see their share prices get punished during market panics.

But in Pacific Andes’ case, the company seems to have played a hand in the destruction of shareholders’ wealth that we have witnessed over the past two-plus years since March 2012.

Although the fishing outfit had seen its profit increase from HK$623 million in FY2011 (financial year ended 28 September 2011) to HK$953.4 million in FY2014, the company had done so with a massively increased equity base (Pacific Andes’ shareholders’ equity had grown from HK$7.8 billion to HK$11.3 billion in the same duration). As billionaire investor Warren Buffett once said:

“The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share.”

Pacific Andes’ returns on equity has been really low (never once exceeding 10%) since FY2011 and to exacerbate the problem, the company’s also been heavily leveraged all these while. The use of leverage is supposed to help juice a firm’s return on equity. But as we can see in the chart below, even the use of sky-high leverage – as represented by the high net-debt to equity ratios – couldn’t help prop up the fishing outfit’s economic performance.

Pacific Andes historical financials

Source: S&P Capital IQ

With Buffett’s earlier words in mind, it would seem that Pacific Andes has failed “the primary test of managerial economic performance.”

A Fool’s take

None of this is to say that Pacific Andes’ latest rights issue is a bad thing for existing shareholders. The company’s management might yet be able to right the ship and reverse the firm’s ailing economic performance. But at the very least, the company’s existing shareholders ought to proceed with eyes wide open.

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Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned. 

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.