"Looks like a bamboo in the air, but actually it's gold and jade." The rules of the game in the capital market are far more complicated than the superficial adjustment of numbers. Optimizing the capital structure of listed companies is a feast for shareholders and market pursuit, and soaring stock prices seem to be an inevitable outcome. However, is this really the case?
Goheal has been tracking global capital operations for a long time and found that many listed companies have done a good job on the surface when adjusting their capital structure, but there are hidden risks behind it. Today, we will dismantle the truth of capital structure optimization to see whether this game is a shortcut to wealth appreciation or a "mirage" in the capital market.
Capital structure optimization = soaring stock prices? Inertial misunderstandings of the market
Capital structure optimization usually means adjusting the ratio of equity financing to debt financing to reduce financing costs and increase shareholder returns. But the market often has an inertial misunderstanding:
Misunderstanding 1: Reducing debt = good for stock prices? Reducing debt means that the company is more stable, but if there is a lack of growth momentum and the efficiency of capital operation decreases, the stock price may fall instead.
Misunderstanding 2: Repurchasing shares = rising stock prices? Share repurchases will reduce the market's outstanding shares in the short term and drive up stock prices, but if the company's performance is poor, the repurchase funds will become a "bottomless pit".
Myth 3: Increased leverage = high returns? Appropriate leverage can increase ROE (return on equity), but excessive leverage may increase financial risks and put the company into a debt crisis.
Case: GE's capital structure trap
In the 1990s, General Electric (GE) used high leverage to expand, and its ROE was once as high as more than 20%. However, after the outbreak of the financial crisis in 2008, the model of over-reliance on debt plunged GE into a serious crisis, with its stock price falling from $40 to $6 and its market value evaporating by more than 80%.
Goheal reminds investors: Capital structure optimization ≠ stock price increases are inevitable, and the core is still how funds can truly promote corporate growth.
Equity VS Debt: Which is the best choice?
1. Optimize capital structure by issuing additional shares? Equity financing is a "mild" way to optimize capital structure, but its impact is often underestimated by the market.
Advantages:
No fixed interest is required, reducing financial risks.
Suitable for high-growth industries, providing financial support for corporate expansion.
Disadvantages:
Shareholders' equity is diluted, and stock prices may be under pressure in the short term.
If the additional funds are not effectively used, the stock price may be depressed for a long time.
Case: Tesla's multiple equity financing After Tesla went public in 2010, it has repeatedly issued new shares for financing. Although it led to the dilution of shareholders' equity in the short term, these funds were used for strategic layouts such as super factory construction and global expansion, which eventually pushed the stock price soaring and the market value exceeded one trillion US dollars.
2. Optimize capital structure through debt financing? Debt financing is a "double-edged sword".
Moderate leverage can improve capital efficiency, but excessive reliance may lead to financial crisis.
Advantages:
Tax deduction (interest can be deducted from taxes) reduces the actual financing cost.
Maintain shareholders' equity and avoid equity dilution.
Disadvantages:
It is necessary to repay principal and interest regularly, which increases financial pressure.
When the economic environment changes, it may trigger the risk of debt default.
Case: Evergrande Group's high leverage crisis
China Evergrande has long relied on high leverage for real estate expansion, and its debt once exceeded 2 trillion yuan. However, in 2021, the real estate market went down, the capital chain broke, the debt crisis broke out, the stock price plummeted by 90%, and finally went to debt default.
Goheal pointed out that equity financing and debt financing have their own advantages and disadvantages, and companies need to make reasonable choices based on their own cash flow conditions, growth potential and market environment.
The "invisible bomb" of capital structure optimization: beware of financial whitewashing
In the capital market, there is no shortage of companies that use capital structure adjustments for financial whitewashing to create the illusion of short-term prosperity.
1. "Fake optimization" case: repurchases cover up performance declines Many companies create the illusion of increased earnings per share (EPS) through large-scale share repurchases when performance growth is weak. But if the company cannot improve profitability, the stock price will eventually fall back.
Boeing's repurchase crisis is one of the typical cases. Between 2013 and 2019, Boeing invested $43 billion in stock repurchases to push up its stock price. However, the impact of the epidemic in 2020 caused a decline in aircraft deliveries, and the company fell into a financial crisis and was forced to seek government assistance.
2. "Fake optimization" case: Debt swap creates low debt ratio Some companies replace long-term debt with short-term debt to reduce the book debt ratio and create the illusion of sound finance. However, if the operating ability is not truly improved, the company will still face huge debt repayment pressure.
Goheal reminded investors to be wary of listed companies using capital structure adjustments for financial whitewashing rather than truly enhancing corporate value.
Conclusion: Can capital structure optimization really lead to a surge in stock prices?
Capital structure optimization is not a "master key" to rising stock prices. What really determines the stock price trend is still the profitability and long-term strategy of the company.
So, do you think that in the future market environment, companies should prefer equity financing or debt financing? Have you encountered a case where the stock price fluctuated greatly due to capital structure adjustments? Welcome to leave a message in the comment area to discuss, let us unveil the true veil of the capital market together!
[About Goheal] American Goheal M&A Group is a leading investment holding company focusing on global mergers and acquisitions. It has deep roots in the three core business areas of acquisition of controlling rights of listed companies, mergers and acquisitions of listed companies, and capital operations of listed companies. With its profound professional strength and rich experience, it provides companies with full life cycle services from mergers and acquisitions to restructuring and capital operations, aiming to maximize corporate value and achieve long-term benefit growth.
