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China Natural Gas (OTC:CHNG) has registered with the SEC that it intends to sell up to $60 million of common stock, preferred stock, warrants and units. The company intends to use the proceeds to finance growth, including a possible acquisition and expanding facilities.

In other words, CHNG needs more money for expansion. The announcement timing was bad - the market was down. So the stock went down along with the market on Monday. Of course, investors are concerned about potential earnings dilution with more stock outstanding. This caused some investors to sell.

However, if the earnings growth more than offset the cost of capital, then issuing more stock is a good thing, since the funding can help CHNG to expand and to increase earning. Generally, whenever a company announces potential stock offering, some investors will sell. Then investors will examine the reason for the stock offering. Sometimes, companies sell stock to pay down debts (most companies are doing it now), and some companies simply need more money (like banks now). However, when companies issue stock for expansion, then the stock potential can go up even more since the funding is to increase earning growth.

Of course, a company can choose to grow based on its internal equity generated from profit. But the growth will be limited.

To reach a company's potential growth opportunity, the company should issue more stock as long as the earnings growth rate is more than the cost of capital. Given the history of earnings growth at CHNG, issuing more capital to reach its earning potential is a prudent strategic plan.

Source: China Natural Gas Plans to Raise More Capital for Possible Expansion