A company can raise capital in two ways, either through debt or equity. So far, public miners have opted for equity to expand operations evidenced by their financial leverage ratio.
Want more mining insights like this?
This ratio measures the balance of funding between debt and equity.
- A ratio of 1 indicates equal amounts of financing between debt and equity.
- A ratio of less than 1 means a company’s financing mainly consists of equity.
Financial Leverage Ratio of Miners (2021Q2)
- RIOT: 0.00
- MARA: 0.00
- BTBT: 0.00
- HUT: 0.02
- BITF: 0.06
- HIVE: 0.19
YoY Shares Issued (2020Q2 to 2021Q2)
- BITF: +77.4M
- MARA: +75.1M
- RIOT: +59.4M
- HUT: +46.5M
- HIVE: +35.2M
- BTBT: +31.7M
Before scrutinizing the accelerated share issuance, it’s essential to cover the advantages and disadvantages of equity and debt financing.
Advantages of equity financing
The primary advantage of issuing equity is the lack of debt and interest payments, making it less risky than debt financing to the company. Equity investors do not have to be repaid their initial capital and allow the company to focus on reinvesting its cash flows instead of worrying about making debt and interest payments. In addition, equity investors are typically long-term focused and want to see the company grow. They can bring in additional sources of capital like new streams of revenue, expertise, and talent.
Disadvantages of equity financing
The main disadvantage of equity financing is dilution. Dilution hurts current shareholders by reducing their ownership percentage, control, and claim on profits in the company. The negative effects of share dilution can be negated if the company successfully earns a return greater than the current earnings per share before dilution. Another disadvantage is the potential misalignment between current shareholders and new shareholders.
Advantages of debt financing
Unlike equity financing, debt does not dilute shareholders’ interest. Debt financing also receives favorable tax treatment as taxable earnings are reduced. Additionally, debt increases leverage and leverage boosts profitability. Debt financing is also cheaper than equity since it is less risky to investors.
Disadvantages of debt financing
The main disadvantage of debt is that a company will need consistent revenue to ensure timely debt repayment. If the industry takes a turn and the company has too much debt than it can handle, it will default to lenders, unless it can raise additional capital. Lenders also have special covenants that are unique and could be restricting.
So, is rising shares outstanding concerning?
No, not necessarily. The tables below show that revenue and revenue per share growth are outpacing share issuance.
This implies that the capital received from equity offerings was put to productive uses and created shareholder value. Not to mention, miners are still in the early stages of an industry that is yet to be established. As the mining industry matures, it’s reasonable to expect a transition to debt financing over equity.