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No. of Recommendations: 3
Phileo: Why does share
dilution, something that doesn't give us insight into
the health of the business, be given equal footing
with the Flowie, which gives us direct insight into
the health of the business??? Actually, out of all of
the Financial direction criteria, I find shares
outstanding to be the least useful because it doesn't
give me any insight into how well the business is
being run.


There are two reasons I can think of why shares outstanding is given the weight it is in the RM spreadsheet. (1) From an investment point of view, new shares dilute the interest of current shareholders. Yes, this point has nothing to do with how the business is being run, but it has loads to do with how much your little, tiny (in most cases) piece of the business is worth and will be worth. (2) Equity financing (issuing new shares) is a very expensive way to finance new growth. If a company has to issue new shares, it shows that it cannot generate the funding to expand growth internally, or else it does not intend to. This is an expensive proposition for the company and the shareholders.

Also, as an aside, the shares outstanding measure is not worth nearly as much as the Fool Flow. A good FF ratio can earn a company up to 9 points (2 for location, 3 for direction, and 4 for monopoly status) while reducing shares outstanding will earn a company 3 points maximum.

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