Abeginners guide to decoding the important bits in the Mighty River Power offer documents

by Tamsyn Parker tamsyn. parker@ nzherald. co. nz How a company makes its money and the risks involved are the two main points to focus on when reading through an investment prospectus, say finance experts.

The prospectus for Mighty River Power is already online and will be available in hard copy from Monday when the offer officially opens to investors.

The 250- page document has a lot of detail in it.

Massey University finance professor Jeffrey Stangl said people should let their commonsense prevail when reading it.

‘‘ Investors should read the prospectus with a specific filter looking at the cashflows of a company and what the risks are to those cashflows,’’ he said.

A company’s value was based on cashflow and the surrounding risks, said Stangl, who holds an MBA in finance and is also a chartered financial analyst.

A major risk to Mighty River Power — the potential closure of the Tiwai Point aluminium smelter by majority owner Rio Tinto — has already been widely talked about. But it’s not the only risk. The prospectus has 22 risk categories specific to the power company as well as general investment risks.

Nigel Taite, president of the Institution of Financial Advisers, said risk assessment could be pretty difficult for the average man on the street.

‘‘ Most individuals and most financial planners don’t have all the skill sets required to make that assessment accurately.’’

Taite suggested getting professional help and said the cost of that advice should be included in weighing up the decision to buy the shares.

‘‘ For the average person who is going to put in a couple of thousand dollars getting advice from a stock broker will be adequate,’’ he said.

‘‘ If you are looking to add the stock to your portfolio or need cash- flow then it might be better to see a financial adviser.’’

Taite said potential investors should also look closely at who the directors and management are and who to contact if something does go wrong.

He said the financial structure of the company was also important.

‘‘ How much debt does the company have? What is its current level and how much can they borrow up to without getting further approval from shareholders?’’

Massey’s Jeff Stangl said as well as looking at the company itself

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