Opinion

Payback investment rule

Dr. Moyi Harry Ruben
The payback investment rule states that you can only accept to invest in project or Company if its cash flows pay back its investment regularly, in the case of shareholding and within prescribed period, in case of debenture and Certificates of deposits (CD). To apply the payback rule, you first calculate the time it takes to get your money back or your initial capital on investment. Then accept the project if payback period is less than prescribed length of time, compared to other projects that you could have benefited from, had you taken correct decision, otherwise you should reject the offer of any company that does not pay dividend or payback period is too long or unknown. A company that has not paid dividends for two years or more, immediately you should disinvest in that company because of unknown risk. Investment is made to add value to your earnings, therefore, there is need to know where we can maximize our earnings.
Shares are one of these investments that are traded in financial markets (stock exchange markets) all over the world. The price of investing in shares is the rate of Dividends earned. Therefore, any investor who wanted to invest in shares should understand the content of dividend policy of the organisation or company, otherwise, bad decision may be encountered later. There are three main types of Shares: 1. Preference Shares, the holder of these shares do not participate in management of the company but receive fixed rate of dividend and unpaid dividend is payable as well, whether the company has made profits or not. 2. Redeemable Shares: these shares have a maturity date on which the original sum or principal amount is repaid. In the case when redeemable period is not stated, it should be calculated using the formula 1+r/r meaning: 1= principal amount; r = Redeemable rate and /r = divisible rate. And ordinary shares entitle the shareholder to residual profits if remaining profits are available for distribution. Dividends are received after all creditors are paid. No arrears of dividends; no dividend claimed when profits have not been declared and no dividends if no profits during the year. Legal entity principle states that, when a company is registered a public company, it become an artificial Legal person, it can sue and be sued in its own name. Therefore, shares once purchased will not be reclaimed by the holder. The only option for the holder is to sell the shares in the open market or stock exchange market either at a premium or at a discount respectively. Note that if the law or a company memorandum of Association or in its articles of Association is silent as to the types of shares offered, the legal implication is that the shares of that company is presumed as all of ordinary shares in type. Conditions and the terms shall be as described above. Therefore, when considering investing in shares make sure you know the types of shares you intend to buy. A company may wish to pay you dividend in form of shares this is by law allowed but ask yourself, is this company paying dividend regularly? If not, do you want to add more liability to yourself and earn nothing at the end? What is then purpose for your investment? Investment principle states that invest in projects, or Assets that earns you the highest returns or earnings. The hurdle rate should reflect the riskless of the investment. Hence, invest in company where marginal revenue or earning is above the break-even point. Breakeven point is where total Revenue = total fixed cost + variable cost at zero profits and zero losses. If the company does not pay dividends do not invest in that undertaking since you will only entry yourself into more liabilities than benefiting, also note that dividends in form of shares is adding to your liabilities with the institution.(Ref Company Liquidation Rule). Cash in hand is worthy than anticipated profits in un-known world. Also, note that, When any institution bails another institution, this institution is not a shareholder of that institution or company but a bailer of the company in time of liquidity deficit and it is govern by bailment law and normally the bailer is treated as a creditor of the company and this company can redeem its bailment at a premium that shall be determined by law if no percentage in lieu has been mentioned. A shareholder by law must have their names registered in the shareholder register with the allotted share capital indicating paid up shares and shares at call if any, and shareholder must also have a share certificate otherwise, without this the person shall not claim that he or she is a shareholder of any company. Shares are traded all-over the world, in commercial cities of the world i.e. London, Tokyo, Shanghai, Walls street in New York and some cities in Africa, Khartoum, Nairobi and so on. Another local investment other than shares is Saving Deposits with Banks, example, Fixed Deposit, are supposed to earn interest annual or according to the agreed period but in South Sudan due to lack of control over these institutions they took advantage not paying interest to this accounts especially the local banks, this amount to a breach of obligation and contract that has be stipulated at the back of the Save account booklet. This interest although very little, can cover part of the fall in value of purchasing power of the individual cash balances. Banks for example must appreciate the willingness of someone to put money in the bank with hope of getting something at the end gets nothing; this is what we call bad investment. Otherwise these could as well be invested in an alternative investment. I therefore encourage banks to respect their contractual obligations, to pay the interest on the demand deposits in the saving book. We do not have Islamic Banks here; even in Islamic Banks they pay what is called Musharaha, Mudarabah and Salam. There are some Banks still implementing the former Sudan Policy of Islamic Banking by refusing to pay interest, the purpose of this saving is to mitigate the effect of fall in the purchasing power of the currency including the dollar.
The author can be reached via mobile number: +211 912940728

Leave a Response