Reverse stock splits: What Do They Tell Us About a Company?

Alexander Dillon
3 min readApr 13, 2023

A firm may modify the number of shares issued through a reverse stock split. The corporation cancels existing shares on the effective date and distributes new shares to owners directly proportional to the number of previously owned shares.

A reverse stock split increases a company’s profits earnings per share (EPS) by dividing the number of shares it issues after the split by the net income it earned before the move. For instance, a corporation would have $5 million in EPS following a 5-to-1 reverse split if it had $1 million in net earnings before the split.

Companies doing reverse stock splits frequently do so to increase their company’s share price. But they frequently fail and occasionally signal concern.

Reverse stock splits can be used by a firm for various purposes, including volatility reduction and the reinstatement of a quarterly dividend. One such is Citigroup, which chose a 1 for ten reverse splits in 2011 to help stabilize price swings and maintain its quarterly dividend.

Reverse splits, however, can also pose a danger to investors because they have resulted in significant financial losses for certain businesses. As a result, it’s critical to understand the rationale behind any reverse stock split and to avoid selling your shares hastily when one occurs.

Companies desire to increase a falling share price, one of the most frequent justifications for reverse stock splits. They frequently do this by raising the number of outstanding shares while concurrently lowering the share price.

Businesses sometimes use reverse splits to reduce the number of shareholders and increase liquidity. Long-term gains from these adjustments are possible, but shareholders should carefully examine whether a reverse stock split would benefit them.

In other words, reverse stock splits affect the share structure of a firm, not its total worth. This implies that a company’s market cap should be equal before and after a split.

A reverse stock split lowers the overall number of shares that a corporation has issued. The value associated with each investor’s total holdings is preserved, nevertheless.

Companies utilize reverse stock splits to raise the value of their shares and win over investors. They occasionally also try to adhere to stock market minimum standards.

A 1-for-5 or 1-for-10 reverse stock split is the most popular option depending on how many shares the business has issued.

In the event of a 1-for-10 reverse stock split, stockholders who had 1,000 shares of the company’s stock before the split would suddenly control 100 more shares, and the stock price would climb tenfold.

Companies can easily obtain funds from shareholders through stock dividends without issuing additional shares. However, a business can elect to divide its shares instead, particularly if its share price is out of whack.

Reversing the stock split decreases a firm’s share count to a level that more closely reflects the company’s size. This raises the share price and encourages investor confidence.

This procedure can also assist a business in avoiding delisting from a stock exchange, particularly when the market price has been too low for an extended period. Most exchanges have minimum share price criteria, so if the stock has been trading for a considerable amount of time below $1 per share, it can be taken off the market.

A firm could decide to reverse split its shares for various reasons. For starters, they can continue trading on the Nasdaq or the New York Stock Exchange.

Additionally, it may be utilized to raise a stock’s market capitalization and boost its appeal to institutional investors like mutual funds and pension funds. It can also stop a firm from losing its listing on these exchanges due to unfavourable investor views of its stock price.

A corporation’s price per share may increase due to a reverse stock split. This might be beneficial for a business with financial difficulties or lagging behind its rivals in the market.

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Alexander Dillon

A company called GenCap Management was started in 2021. Alexander Dillon is one of the co-founders of the company.