Growing With A Constrained Balance Sheet

- Simon Brown

In the issue of 24 May, I wrote about lazy balance sheets that are not being used to their full potential, and how the board of directors must either sweat the assets or return them to shareholders via dividends or share buy-backs. (Read that article here: https://bit.ly/2KLsqte.)

This time I want to focus on a constrained balance sheet – one that is not able to grow to its full potential.

What I am talking about here is typically found in the smaller-cap stocks (stocks with a market capitalisation of under R1bn), but it can often be in the mid-cap stocks too. What we’ll see is the founders of the business having a large stake, usually over 50%, and often up to around 70%. Traditionally, investors view this as positive, as it means the founders are significant owners in the business and hence the interests of minority shareholders will be protected by the majority founders. Further, the founders’ wealth is mostly tied up in the business, again helping to ensure they run it well, and with shareholders’ interests well looked after.