A careful look at India’s history would suggest that the country has not been as tolerant to thought schools other than the dominant thinking of the days. Among the casualty of the suppression of free thought is a great tradition of atheism in India. Long before the advent of existentialism in Europe, India had a materialistic and atheistic line of thought with the Indian philosopher Charvak being a leading proponent of it. One of lines attributed to him is:
Yavaj jeevet sukham jeevet, rinam kritva ghritam pibet.
Bhasmeebhootasya dehasya, punaragamanam kutah.
(“So long as you live, live a happy life, incur debt eat ghee [lead a rich life]
[because] once the body turns into ashes, there is no rebirth.”)
Apart from denying the existence of god, and rebirth, his thinking went against the conventional Indian thought of living well within your own means. So there should be no surprise that “rinam kritva ghritam pibet” was buried under load of the holy books.
Then in the early 20th century, suddenly, the entire world embraced Charvak. All over the world individuals took debt to enjoy life – to buy cars they didn’t afford, to buy homes they didn’t afford… to buy a life of borrowed affluence. The companies took loans to do acquisitions for which there was no pressing hurry. The phenomenon was global and all pervasive. However, it would not have been possible for the global economy as a whole to increase the amount of debt unless the lenders reduced their lending standards and gave loans to the people/companies who didn’t afford those loans. I fail to understand how, but it so happened that for every debtor seeking a loan there appeared a lender willing to provide loan. For every lender willing to provide a loan, there appeared an insurer willing to assume a major part of the risk of default. And thus started a wave that took to unprecedented heights, the global economy and every financial market you can think of – stocks, debt, commodities, real estate, art…
But Charvak wasn’t talking about the greedy pursuit of more and more money when he said “incur debt”. He was just talking about leading a good life. There is a limited amount of money that can chase consumption. There are limits to what a given number of human beings consume. However the limits to what they can invest in, are elastic. Although, in the long run, a free market will never allocate investment to the areas where there can not be any returns, the short term story is very different.
The return on investment is a variable that gets its value in future. The perception of ‘risk adjusted return’ is what drives investment. This perception is what drives markets into boom and bust cycles. In most forms of gambles the increased returns are usually associated with increased risk, but, it is very surprising that the booms are characterized by not only irrational expectations about high returns but a simultaneous (and fatal) lowering of risk perception. When the prospects look mouth watering people turn a blind eye to risk. In the past few years whenever I talked about the risk in investing in real estate, almost every time I had people telling me: “Real estate doesn’t go down”. And they were so fanatic in their belief that I used to leave them with their mistaken beliefs the same way I leave the religious fanatics when they talk about God.
Times have changed. The chickens have come home to roost. The question is no longer about growth or the future. For the individuals it about how to save their job, how to pay the next installment on their home loans to avoid foreclosure. For the companies it about how to pay the employee salaries, how to pay the suppliers, how to repay the loans maturing next year…
Indian companies are not going to be left unscathed. In the financial years ending 2005, 2006, 2007 and 2008 the Indian companies raised loans worth 13.5, 17.2, 25.4 and 31 billion dollars respectively. Starting 2009, the repayments will start kicking in. Given the state of financial markets, it’s hard to raise any kind of funding. The debt has become the Achilles heel of corporate India.
It is about time the equity investors realize that their claim on a business is subordinate to senior securities. When a company goes bankrupt, the creditors must be paid in full before a penny accrues to the stockholders. In such a scenario, before analyzing the attractiveness of the stock of a debt ridden company, we have to see the attractiveness of the bonds of the company. If a company’s debt is rated as junk, the common stock is, automatically, junk. It is a time where the stock analysts have to throw their discounted cashflow models and analyze whether the company is in a position to repay its debt.
The news on this front isn’t good. Business Standard reports that the bonds of many Indian companies which raised debt from external markets are selling at such huge discounts that their yields are as high as 30 to 50 per cent. In simple terms, it means that the investors are unwilling to buy bonds of these companies even when the current prices give them 30 to 50 per cent interest assuming the company doesn’t go bankrupt at the time of redemption of the bonds.
This is a wakeup call to all the investors in debt ridden companies (myself included). The growth in revenues or operating profits that gets highlighted in quarterly results doesn’t matter. What is hidden in the balance sheet does. The inevitable bankruptcy is dogging many Indian companies. There are big names in the list of corporates haunted by debt.
This, relatively somber issue of Unfair Value is focusing on analyzing how to avoid landmines in your pursuit of good investment returns. It is also riddled with unavoidable complexities because the subject matter at hand demands it.
If you think Charvak was wrong when he said “Bhasmeebhootasya dehasya, punaragamanam kutah” (once the body turns into ashes, there is no rebirth , I would leave you alone, for your belief can never be proven wrong even if it is false (when you cease to exist, how will I tell you, “You see my friend, you were wrong!”)
But I must tell you one thing for which there is ample evidence in the history of corporate finance.
Once a company goes into a debt trap there is no coming back.
References
May 5th 2008. Unitech Limited hits a high of 337.80 Rs on BSE. Less than 6 months later, on October 24th, Unitech hits a low of 26.5 Rs, falling 92.1%. A week later it rises by roughly the same percentage points to Rs 48.
It makes you wonder, did I miss a chance to make a quick buck? The same story is repeated in innumerable counters, in markets all across the world, and it becomes hard to optimize the risk-reward equation. Should you buy risky stocks that may rise 2-3 times or buy quality stocks even though you know they haven’t fallen significantly from their highs and aren’t expected to shoot up like a rocket?
Let me ask you a question. Suppose I give you a bet in which, if you win, you can make 20% profit. You have 75% chance of winning this bet but if you lose you will have to pay me double the returns you would have got (40%). You can calculate that this bet has a positive expected value for you. If we play this bet every year for 50 years, you will almost surely win. You must take this bet.
If you didn’t, please revise your high school arithmetic. If you did take this bet, let me, for a moment, try to wean you away from this winning bet. I give you four more options from which you can pick. In each option if you lose the bet, you lose twice the percentage returns (n% in you win, -2n% if you lose). Once you pick your bet, we will play this once every year for 50 years. These options are explained below.
| X | A | B | C | E | |
| Returns on success | 30% | 20% | 15% | 12% | 9% |
| Probability of success | 66% | 75% | 80% | 90% | 99% |
Going only by your instincts (remember the power of compounding!), would you keep the 20% option or change it to any other bet? If yes, which one?
For those of you who didn’t change their mind or didn’t change it to the most conservative option, it would help if you were to reassess the value of certainty or near certainty. The expected annual compounded returns are highest in bet E (8.7%), lowest in X (-12.9%) and almost negligible in A (0.9%).
Value investing is not about finding the stocks that can give you (say) 10 times returns. It is about finding the stocks which are almost certain to give above average returns. Value investors should not attempt to beat the market averages but they should focus on maximizing the certainty of good returns. The term ‘good returns’ means returns above the risk free rate of returns (from government securities, FDs, etc.). The concept of margin of safety comes from this simple mathematics.
The quest for margin of safety does not kill returns as you would expect. It does just the opposite. Your efforts to ensure the certainty of good returns limit your investment horizon to businesses which are equally certain to generate good returns due to their competitive advantage, brand value or intellectual property.
At the same time, the more certain you are, the more concentrated your portfolio will be. Diversification is not a panacea against the risk of losses. Over diversification is a bigger evil than low diversification. I’ve seen many people holding 5-10 mutual funds (and sometimes a fund of funds). Each mutual fund is diversified into 50 to 200 stocks. So you can be absolutely sure to have funded every Tom, Dick and Harry who happens to bring out an IPO. Warren Buffett was dead right when he said he would almost certainly improve your investing record if he gave you a punch card and each time you buy a new company, your card gets punched. After 20 punches, you're finished. No more stocks, ever.
Twenty stocks in a lifetime? Some day traders will say “Gee, I bought 20 last week!”
Let me give you a stock to consider (Don’t rush to buy!).
Manaksia Ltd, Price 34 Rs, EPS 15.7 Rs, Book Value 89.7 Rs, Net Current Assets per share 46 Rs, Dividend per share Rs 2, Debt to Equity 0.43, P/E 2.16, 52 week high 212 Rs, low 26 Rs.
Howsoever attractive it may look, can you be certain about a company whose name you just heard today? Can you waste one punch hole from your punch card on this? On the other hand, a leading company selling below fair value can be an investment where you can put all your investment and rest easy. In fact most of the promoters have all of their wealth concentrated in very few companies. In the last 17 years, I haven’t seen the networth of many large business houses going down in the long term but I’ve sure seen many individual investors permanently losing their money by investing in a bunch of well diversified mutual funds and booking losses when it is too late.
I’m emphasizing this point because in the current environment there is enough junk selling at bargain prices. Stay miles away from temptation. Buy the companies that are certain to remain in business 10 year hence, that are certain to earn decent returns on their capital investments, that are certain to keep their competitive advantage intact and thereby grow at least as much as the economy. All of these returns mean nothing if the management lacks integrity. Invest only in those companies who care about their shareholders and run their business in the most ethical manner. Finally, the financial figures mean nothing if the company shows more creativity in accounting than in their products. So it pays to be certain that the numbers reflect the actual state of the business.
Rationality is not as intuitive as you may think. It’s a good idea to learn from others’ mistakes. It’s not bad idea to lose few dollars on gambling if that helps you in learning to deal with probabilities and decision making under uncertain information. To learn by investing your hard earned money in stock markets is certainly suicidal.
To quote the Will Rogers “There are three kinds of men: The ones that learn by reading; The few who learn by observation; The rest of them have to pee on the electric fence and find out for themselves”
Fortunately you have the option to choose your kind.
In the beginning of the year I was flooded with queries on my views on the Reliance Power IPO.
I joked with everyone that I’ll buy it at Rs 84 (roughly at two times its cash per share post the IPO). When someone told me that it was oversubscribed 7.6 times in the first two hours and in the black market it is selling at 800 plus, I told him that his information, although correct, doesn’t change my bid.
Last month when it hit a low of 106, my friends were joking that I should get ready with the cash. I told them that I always reserve the right to change my mind and I won’t buy it even at Rs 84 now.
I told them a story about the way bargaining works in Ladakh. I had just landed at Leh. I had to go to the town, some 2 km from the airport. The taxi driver asked me Rs 200 which I found steep. I tried to negotiate for 150 but he didn’t budge. All the other taxi drivers standing nearby said 200. So I agreed but to my shock he said, “No, the rate is 300 now”. I screamed “Why?” He replied, “The rate has changed now and it will be 400 if you waste more time.” I took the taxi. Twice in my life I’ve done 200 km long treks in the frozen mountain deserts of Ladakh and I’ve learnt how bargaining works there.
It’s a seller’s market. Be willing to pay and do the minimum bargaining or pay a hefty price.
In February this year, Warren Buffett threw a $800bn lifeline to bond insurers which they rejected. Few weeks later, when asked if the offer still holds he said, “We give them an offer that's, you know, it's basically--like the used car salesmen used to say on their warranties, 20-20. It was 20 seconds or 20 feet.” He meant if you walk away for 20 feet or wait for 20 seconds the offer is no longer valid. He knows he is in a buyer’s market.
The bottom line of the story is that the strategies in a market skewed in favor of the buyer or seller are very different from normal market conditions. If you are in a seller’s market like that taxi driver in Leh, or in a buyer’s market like Buffett, you have the power.
In such cases
• You should be choosy.
• You should name your price.
• You shouldn’t go on a frantic chase of the opportunities. You should decide what you want to buy/sell at what price and then wait for opportunity to knock your door.
• You shouldn’t be afraid of letting go of some opportunities because there will be many more to come.
• The frenzied crowd will at times throw what may seem to be some pretty good bargains. Only when you are really sure you must act, and decisively.
Einstein had said, "Make everything as simple as possible, but not simpler."
Most people find it hard to give up their quest to over-simplify things. When faced with a complicated problem which we can’t grasp, we resort to over simplification and fool ourselves that we can deal with the problem. Charlie Munger had once said that if you don’t know the periphery of your circle of competence, your competence is questionable. But all our life we are in search for a Magic Formula for everything. If you type ‘magic formula’ on google search bar, it reveals 1.1 million results which includes magic formula for everything.
In investing, Greenblatt’s ‘Magic Formula’ suggests purchasing 30 ‘good companies’ – cheap stocks with a high earnings yield and a high return on capital. In his book ‘The Little Book that Beats the Market’ he claims that this beats S&P 500 96% of the time, and has averaged a 17-year annual return of 30.8%. For the lay investor, it offers market-beating returns without the complexity associated with a discounted cash flow analysis.
This isn’t too complicated to follow? Why, then, aren’t there millions of investors seeing Warren Buffett eye to eye in terms of returns?
The answer can be traced to simple mathematics. Let me start with an often used ratio P/E which is a ratio of share price to earnings per share (EPS). It can also be interpreted as the ratio of market capitalization to the net profit of the company.
Answer this simple question.
Suppose I give you one of the following pieces of information about a company:
a) P/E ratio
b) Stock Price and EPS
c) Market Capitalization and Net profit
Do you get same amount of information from each one of these or different?
If you see carefully, you would note that the ratio, while being simpler, entails loss of information.
Take this information based on option a. Educomp Solutions, an education solution provider company in India, is selling at a P/E of 64, on the basis of FY07-08 earnings. The company has shown steady growth in profits and on trailing 12 month (ttm) EPS the P/E stands at 39. Another company, Mahindra & Mahindra quotes at a P/E of 8.59 on the basis of FY07-08 EPS. But the company’s profits are expected to be lower this year.
Take this information based on option a. Educomp Solutions, an education solution provider company in India, is selling at a P/E of 58, on the basis of FY07-08 diluted earnings per share. The company has shown steady growth in profits and on trailing 12 month EPS the P/E stands at 39. Another company, Mahindra & Mahindra is trading at 5 times the FY07-08 EPS. But the company’s profits are expected to be lower this year.
On the basis of this information, Educomp looks expensive but do you know exactly how expensive. Now let me provide you the information based on option c. Educomp Solutions reported a profit of Rs. 67.74 Crs. in FY07-08 and its current market capitalization is 4187 Crs. M&M reported a profit of Rs 1571 Crs and its current market capitalization is 8623 Crs.
Now you can see how gross the difference is.
The next big problem is the fact that profits are not guaranteed for any business. Nor are they expected to change in a predictable fashion. That’s why Graham insisted on taking average profits for a number of years instead of last year’s profit. M&M’s 3 years average consolidated net profit is 1490 Crs whereas Educomp Solutions’s average is 37.5 crs.
Now you can see that M&M’s market capitalization is only twice that of Educomp when M&M is a company 40 times as big as Educomp. Comparing P/E ratios doesn’t make this fact as obvious.
The absolute numbers give vital information. The defense expenditure of United States as a percentage of its GDP may not look substantially different from India’s but the defense spending of United States is almost the same as the rest of the world combined. You can tolerate the price of Catch table salt even though it’s 10 times the price of Tata salt on per kg basis, but you can’t tolerate a mere 15 percent increase in body temperature. The absolute numbers matter.
Many people fail to maintain well-oiled number crunching machines inside their skulls. They open calculators to convert dollars into rupees. For them the ratios are akin to precooked food that they lap up with ease without ever trying to find about the ingredients. If you can’t do simple number crunching, take my advice. Forget about investing in stocks. Buy index funds or keep your money in other safer assets like fixed deposits.
Coming back to P/E.
The P/E of a company can change due to many more reasons apart from changes in the performance of business. For example, the following table depicts a scenario where a company comes out with a 1:2 rights issue at the market price.
The cash infusion raises both the market capitalization and the number of shares of the company. However the newly added cash can’t change last year’s profit(!) which causes the P/E to shoot up from 15 to 22.5. However the newly added cash can’t change last year’s profit(!) which cause the P/E to shoot up from 15 to 22.5. Is the company more expensive merely because it has added 750Crs to the cash and its value has also increased by 750 Crs?
PEG ratio, which stands for (P/E)/Growth, takes this stupidity to a new level. This ratio does an excellent job in rationalizing any arbitrary valuation. The company is selling at P/E of 60 and its net profit has grown at 60%, the PEG is 1. So its not even defined correctly. It’s actually a ratio of P/E in decimal to growth in percentage terms.
That brings me to net profit growth, the holy grail of the markets. The growth figure doesn’t depend only on how high your current profit is. It also depends on how low your base was. The headlines scream: ‘Profit jump by 900%’ and you would see that the profit has come back from a lowly 1Crs to 10Crs. The analysts weren’t happy with that. So they invented Q on Q growth. That is the growth of profit in this quarter compared to last quarter. Most businesses have seasonal variations in the profits. There are many factors - sales in festive seasons are higher, financial year end impacts corporate spending. Even for non seasonal businesses, like IT companies, there is significant change in the business in different quarters because typically the IT budgets in the clients organizations are allocated in the beginning of financial year. Such is a fascination of the markets with Q on Q growth that the companies resort to profit smoothing. In a quarter of high growth, they will not report a major contract, in the next quarter if they fall short of guidance, they will show such earnings or even earnings recognized in advance(and then show them as receivables). The revenue recognition norms are twisted to make the curves smooth.
Does this mean we should not lay too much stress on the financials of the company? No. The analysis of the financials can give important clues to the characteristics of the business and the perception of the investors about the risks inherent in the business. However, such analysis (a) should be free from computational errors of the kind described above (b) should not be used to derive incorrect conclusion (c) should not be used to derive any conclusion at all.
Suppose I find a company which is making 30% return on networth and selling at less than book value and at 3 times the profit. I won’t jump to buy. I would usually gather information about the company to find out the reason for such high profitability. It may be due to temporary spike in output prices(like in commodity companies), due to one time factors or due to competitive advantage of the business. If the business is attractive, I would try to find why the stock is being undervalued so much. Markets are correct most of the time about most things. There are only few pockets in stock ticker space-time where they get it wrong and horribly wrong. You can not beat the markets without being wiser than the collective wisdom of the investors. It is easier said than done.
The numbers are byproduct of the business activity. Until you understand the business, your decisions based on the financial information are a shot in the dark. It is easy to do number crunching to tell how different variables are positively correlated with high return in past decade or century but investing is all about finding what would lead to better returns in future. To do this, there is no magic formula.
“And they are broke! They are broke! They don’t have a negative cashflow position. They are f***ing broke!”
George Carlin’s voice echoed in my drawing room. He was poking fun at the use of euphemisms in English[1]. I love George Carlin. He i considered the greatest standup comedian ever. A perfect start for my Saturday morning when sun rises at a perfect time. Sometime after 11!
But wait a minute. I was in no mood to waste even one plank energy of my brain cells worrying about problems of financial world. But as luck would have it, I found myself thinking about the bunch of companies, which had admirable businesses growing at steady pace. And suddenly they are broke.
This is a grim story of a company which had no reason to get into the quagmire it has found itself in. As the new millennium arrived, Brokelyn Ltd, had manageable level of debt. It had debt of 800 Crs and networth of 1200 Crs. It made Rs. 400 Crs of operating profit. After paying 80 crs in interest, 50 Crs depreciation and 50 crs tax, it made 220 Crs of net profit which was decent 22% of the networth.
The company was a family owned business and had been quite conservative in financing. The aging promoter gave reigns of the company to an ambitious CEO who wanted to make company’s profits soar. To help him with his pyrotechnics he hired a new CFO who was well versed with the finance wizardry to achieve the magic. They wanted to expand their business empire and to that end, they chalked out an ambitious expansion plan. The plan needed additional cash for the job so decided to rely exclusively on debt. The interest on the debt was a drag on the profits which ensured that while the revenues grew, the net profits grew at a pace too slow for the linking of the CEO. By March 2004, the profits were 280 Crs after interest payment of Rs 200 Crs.
Immediately after FY04 results the CFO hatched a new plan. The RBI had allowed the companies to borrow from external markets. The risk appetite of the foreign investors had gone so high that they were willing to give dollar denominated loans to emerging market companies at very little premium over LIBOR. It was the time when banks were busy doling out mortgages people with no income, no job and no asset except the house they owned. Those were the days of easy money, at times, almost free money.
The company raised 1200 crs from Foreign Current Convertible bonds denominated in dollars. These were zero coupon bonds sold at par with yield to maturity of 7%. The bond holder had an option to convert the price into stock at a price of 252 Rs, 50% above ruling price of Rs 168. If he doesn’t convert into equity he will get all the 5 years cumulative interest at the time of redeeming the bonds.
The beauty of the scheme was that they had to show no interest in their profit loss account. In a zero coupon bond there is no periodic interest payment. You pay the accumulated interest only at time of maturity.
But what would happen at the end of 5 years? One of the 3 things:
The bond is a convertible bond. Assuming the stock price rises above Rs. 252, the bond holders would convert into equity. So there will be no debt repayment
If the stock price fails to rise, you can always take more debt to repay this debt issue. After all, the world was awash with liquidity.
The company is earning a healthy 17% on the capital. In 5 years, it would have made enough money to pay back the debt from internal accruals.
Sounds nice …like all the smart plans that lead to horrible disasters.
When you take foreign currently loans you get it cheaper than domestic loans but the depreciation of rupee against dollar adds to the interest. However, Brokelyn Ltd was lucky. In March 2007, the dollar was quoting at a rate little less than the exchange rate of March 2004. The company added 1000 Crs more in debt to its books and showed ONLY 90Crs in interest on loans of 3000Crs. Why? Because it didn’t have to pay interest till March 2009!
The company was not doing anything illegal. It was not even cooking the books. The accumulated unpaid interest was disclosed as contingent liability. Had they not done it so aggressively, it would have been a good hedge against the impact on dollar revenues.
The company noted in its annual report
The payment of premium on redemption is contingent in nature, the outcome of which is dependant on uncertain, future events. Hence, no provision is considered in the accounts in respect of such premium.
The auditors gave remark:
without qualifying our opinion, we draw attention to Note 3(g) and Note 3(h) of Schedule 22 to the financial statements. Management is of the view that the liability to pay premium on redemption if any, of Foreign Currency Convertible Bonds is contingent. As the ultimate outcome of the matter cannot be presently determined, no provision has been made for liability if any, that may arise on resolution of the contingency;
The next year, Brokelyn Ltd they got even luckier. Dollar hit a low of Rs 40 in March 2008. This made the company’s dollar liability go down and the difference was shown in the profit loss statement. The company’s business was also doing well. The operating profits rose to 800 crs and net profit rose to 555 Crs. The stock jumped from Rs 100 to Rs. 416.
I’m amazed how our accounting laws permit such things. A firm puts more than half of its capital in form of debt and shows no cost! Aren’t they creating incentives for companies to use unstable corporate structures to jack up the disclosed income?
Anyways, the good days of Brokelyn Ltd. didn’t last forever. In 2008, the falling dollar reversed the trend and hit a high of 49.77 on Oct 24th. In a matter of 6 months, all the calculations went for a toss. The crisis hit the global financial systems and creditors grew wary of lending. The tight liquidity caused the interest rates to shoot up. With many big banks going down under, the risk premiums shot up. Brokelyn Ltd was trapped.
Apart from the adverse business scenario, the same factors that artificially propped the reported profits , started acting in reverse. The rising dollar increased the rupee value of the debt which had to be disclosed as exchange loss.
Now lets take a tour of the future.
March 2009. The company reports 76Crs loss due to Rs 406 crore exchange loss. The market punishes this performance and beats the stock falls 75% to Rs 100. The fall in stock price makes the conversion option associated with bond, worthless. At the time of redemption the creditors have to be paid accumulated interest at a rate of 7% p.a.
The total liability of the loans taken in two tranches, 1200 Crs in 2004, 1000Crs in 2007 works out to Rs 3346 Crs after taking into account the rupee depreciation and the accumulated interest. The company has a networth of 2196 Crs. On top of this they have 800 Crs of domestic loans.
Who will refinance them for a loan twice their networth? The credit markets are still tight. There is little hope for raising capital through the equity market. What would the company do?
Luckily the company is still making good money at operating level. In early 2010, Brokelyn Ltd uses little breather from bear markets to raise fresh capital. But it pays a hefty price. It dilutes the equity by 33%, to raise mere 400 Crs from market. For a company with 400Crs operating profits in 2001, this is really bad.
In March 2010, the company reports exceptional item of exchange loss and accumulated interest on bonds totaling 915 Crs. On top of that the company pays hefty 14% on its refinanced loans of Rs 3000 Crs. All this results in a reported loss of 715 Crs
In 2010, the company with operating profits of Rs 800 Crs is selling at Rs 1500 Crs. Why? The company’s debt to equity ratio stands at 1.8. Its interest coverage is mere 1.9.
This sets the rating of the debt issued by company to junk and when senior securities are in junk category, the stock can’t be expected to be rated high.
Do you own stocks of Brokelyn Ltd? No?? If you are invested in stocks or mutual funds, there are chances that you do. Brokelyn Ltd is a fictitious name which represents all the companies that have found themselves in a debt trap.
These companies, as to today, are still in business. They are hoping desperately that the rupee will rise against dollar. They are hoping that someone will issue them new loans to repay existing ones. They don’t show the interest that’s accumulating on their debt issues.
The report huge exchange losses and derivative losses as exception items. As the debt repayment comes calling, these companies will disclose huge negative cashflows.
George Carlin wasn’t an expert in finance, but he was right.
“They don’t have a negative cashflow position.
They are broke! They are f***ing broke!”
- George Carlkin on Soft Language view
- Broklyn Ltd - Snapshot of accounts
| 2001 | 2004 | 2007 | 2008 | 2009* | 2010* | |
| Equity | 200 | 200 | 200 | 200 | 200 | 300 |
| Reserves | 1000 | 1300 | 1600.9 | 2072.65 | 1996.65 | 1249.3 |
| Debt | 800 | 2000 | 3000 | 2825 | 3231 | 3231 |
| Operating profit | 400 | 500 | 650 | 800 | 600 | 800 |
| Interest | 80 | 200 | 90 | 120 | 120 | 452.34 |
| Exchange Loss | -14 | -175 | 406 | 915 | ||
| Depreciation | 50 | 70 | 100 | 120 | 150 | 180 |
| Profit Before Tax | 270 | 230 | 474 | 735 | -76 | -747.34 |
| Tax | 67.5 | 60 | 120 | 180 | 0 | 0 |
| Net profit | 202.5 | 170 | 354 | 555 | -76 | -747.34 |
| RONW | 20.25% | 13.08% | 22.11% | 26.78% | -3.81% | -59.8% |
| ROCE | 19.44% | 13.03% | 11.95% | 13.88% | 8.61% | 13.8% |
| Debt/Equity | 0.8 | 1.5 | 1.9 | 1.4 | 1.6 | 2.6 |
| Market Cap | 3037.5 | 2040 | 7080 | 8325 | 2000 | 1500 |
| P/E | 15 | 12 | 20 | 15 | ||
| Interest Coverage | 5.0 | 2.5 | 7.2 | 6.7 | 5.0 | 1.9 |
| EPS | 10.1 | 8.5 | 17.7 | 27.8 | -3.8 | -23.8 |
| Book Value | 60.0 | 75.0 | 90.0 | 113.6 | 109.8 | 66.1 |
| Price | 151.9 | 102.0 | 354.0 | 416.3 | 100.0 | 50.0 |
| Contingent Liability | 0.0 | 0.0 | 270.1 | 443.0 | 628.0 | 0.0 |
3. Broklyn Ltd - profits
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