How to read a prospectus before investing in shares

From B9 investors needed to compare it to similar investments to figure out if the company represented good value for money.

‘‘ They need to ask why Mighty River? Put it in context — how does it stack up with other companies that are largely comparable. Contact and Mighty River are pretty much apples and apples.’’

Comparisons are usually made using a price to earnings ratio which Stangl said was how many years of projected earnings investors were willing to pay for up front when they buy shares.

Based on the price range of Mighty River Power shares of between $ 2.35 and $ 2.80 per share and the forecast earnings the price to earnings ratio is between 20.5 and 24.4 for the 2013/ 14 year. That compares to a ratio of 19 for Contact Energy and 18.9 for TrustPower for the 2014 financial year.

Stangl said 24 years was a long time- frame to look forward into and a lot could change over that sort of period. But one of the other driving factors for people being attracted to shares at the moment is the higher returns when compared to banks.

Mighty River Power is offering a gross dividend of between 6 per cent and 7.1 per cent depending on what price the shares are set at.

Des Hunt, deputy chairman of the New Zealand shareholders association, said people should consider where interest rates were going when looking at Mighty River Power.

‘‘ Look at the dividends, make a judgment on how it stacks up, consider where interest rates are heading.’’

Hunt also believed in looking closely at the forecasts a company makes and comparing it to the historic performance to judge how realistic the company is being in making those predictions.

‘‘ When you buy shares on high price earnings with no growth you don’t want them to have a bad result,’’ he said.

‘‘ Have a look at what the growth prospects are or whether it is just a dividend play.’’