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5 August, 2015 - 14:41

When trying to avoid liability, a company may issue a 1 for x renounceable share issue, and sweeten the decline in EPS for shareholders by offering a discount in market value of the diluting share offerings. This of course brings the market share value down. This really annoys professional brokers as well, because they have to back pedal their BUY recommendation and qualify that growth prospects will suffer a short-term earnings downgrade.

In contrast: Before the recent GFC, many companies were being financed with large borrowings , because earnings were good and banks were happy that companies were keeping up with interest payments as well as growing money on trees to meet the principal payment. No one really wanted earnings-per-share to go down by asking shareholders to pay for growth. But with the onset of stifled cash-flow , it was found that fair value should have been applied to some fake cash equivalents, like sub-prime backed bonds, so the numerator of the quick ratio suddenly dropped for many companies, and financial entities had to sell their investments: non-current liability flicked the contingency switch and became current, increasing the denominator of the quick ratio. The quick ratio went from comfortably above one, to a lot less than one. Growing by debt became corporate criminality in some instances. Debt restructuring can occur, but if this involves the permanent devaluation of investors interests e.g. share revaluation, where secured major investors such as banks are prioritized over unsecured shareholders ( 'the punters') , then either the smaller shareholders have to bear major losses so the major investors will continue lending because their interests are secured, or the major finance investors refuse to continue lending, because they cannot obtain their required degree of security, and the company cannot obtain money to pay current liabilities when they fall due, and the company becomes insolvent.