The clear shadow of the requirement of companies to revaluation of assets/transparency in the recognition of profit
According to Tejarat News, Majid Eshghi, the head of the Stock Exchange Organization, announced today: The Stock Exchange and Securities Organization has submitted a proposal to the parliament regarding the country’s five-year plan law, according to which the revaluation of all classes of assets will be required for companies registered with the Stock Exchange Organization.
Positive effects of revaluation for companies
Alireza Tajbr, a capital market expert, said regarding the effects of the capital increase process of companies through the revaluation method: “Revaluation of companies is the right thing to do, especially in the current inflationary conditions in which the country’s economy is caught. Revaluation of assets makes the costs of companies, including the cost of depreciation, seem more realistic. The realization of the depreciation cost prevents the outflow of cash from the company. Therefore, self-reevaluation is the right thing to do.”
Why do some companies avoid revaluation?
Tajbr continued: “In the meantime, many company managers have a short-term view of one year and two years. Therefore, they try to achieve the highest profit during the time they are in charge of the company. “Some company managers avoid revaluation of assets for the reason that revaluation causes the company’s profits to be lower in the short term.”
More precisely, the process of increasing capital through revaluation causes a decrease in equity and, accordingly, assets in the company’s balance sheet. This will increase the return on equity (ROE). The ROE formula is obtained from the net profit divided by the shareholders’ equity. When the company does not enter the revaluation process, the shareholders’ equity becomes a small number and the ROE becomes a high number, and the CEO can defend the company’s performance in the forums based on the high ROE number.
The effect of revaluation of assets on stocks
But can revaluation with a decreasing effect on companies’ profits cause negative market sentiment? In this regard, Tajbr stated with this question: “One of the methods of valuing companies is based on annual dividend. From this point of view, the revaluation will have an effect on the stock price of a company with a decreasing effect on the dividends of companies in the short term. On the other hand, with this capital increase, the number of shares of the company will be diluted and the possibility of price increase will increase.
This capital market expert added: “Finally, revaluation is something that should be done. Companies are facing severe inflationary conditions and the cost and current value of assets in financial statements are not real. In order to make them real and to adapt these things to the current conditions of the country’s economy, the process of re-evaluation must be done.
Tajbr added: “Although the revaluation is a positive step for the capital market, the main problem of the Tehran Stock Exchange is rooted elsewhere. “Unfortunately, there are other factors that have fueled the downward trend of the market.”
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