One way to quickly and easily inform yourself about your stock’s outstanding stock options and warrants is by studying the company’s latest financial statements. In the notes related to the share capital, you will find if there are any employee stock options and/or stock warrants outstanding. It’s essential to analyze not only the in-the-money options and warrants,where the exercise prices are lower than the current share price) but also near-the-money options and warrants, where there is a minimal difference between the exercise price and the current share price). I refer to all in-the-money and near-the-money options and/or warrants combined as the relevant stock options and/or warrants. It’s important to consider the expiry dates as well.
A thorough analysis of your stock’s outstanding stock options and/or warrants can provide valuable insights. When you discover in-the-money stock options and/or warrants owned by the company’s management, it’s worth questioning why management hasn’t converted them to common shares yet. Do they lack confidence in the company’s future prospects to invest their own money in the company?
After identifying in-the-money or near-the-money stock options and/or warrants, it’s crucial to calculate how much cash can be raised when these stock options and/or warrants are converted into common shares.
When management announces a private placement to cover the company’s budget deficit, it’s worth comparing the necessary amount with the amount that can be raised by converting management’s relevant stock options and/or warrants into common shares. This comparison puts everything into perspective.
Note: If you want to learn more about employee stock options, read the article How Do Stock Options Work. For more information about stock warrants, refer to the article Where to Find a List of Outstanding Canadian Stock Warrants.