Beware Companies Raising Cash the Wrong Way

Companies have a number of ways to fund their operating needs. A company can sell shares of stock, such as in an IPO. Selling shares dilutes existing shareholders, so companies that regularly issue shares are likely to underperform.

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  • Otherwise, companies may want to go to the debt market. By offering debt, companies aren’t diluting shareholders. But that debt adds a cost to the balance sheet that needs to come from cash flows. Overly indebted companies can be poor performers.

    Companies that use either or both of these tools moderately and responsibly as needed, however, can use the capital to grow better over time.

    That could be the case with credit services provider SoFi (SOFI), who recently announced a capital raise.

    SoFi has a balance sheet with over $3 billion in cash, but over $5 billion in debt. Companies that provide credit services often have a rich mix of both.

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  • Adding to the cash side of the equation could provide more capital for a further expansion.

    Action to take: Shares of SoFi have performed about in-line with the market over the past year.

    The capital raise may mean a brief dip in the coming weeks for investors to buy, with an eye towards higher profits later in the year.

    For traders, the September $10 calls, last trading for about $0.92, look attractive here.

    Traders may want to buy a partial position now, and use any weakness in the next few weeks to add to that position. From there, traders should look for a summer rally taking shares higher.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.

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