Playing with numbers
My career has seen some interesting twists and turns. I graduated as a Mechanical Engineer from one of the best and oldest Engineering colleges in India, went on to become a qualified Cost Accountant on my own, and have dabbled in jobs ranging from a Project Manager of a Heavy Engineering company to a Finance Executive, to a Management Consultant to a Sales Exec. All along, my interest in macro-economics and the way the economies and markets behave – Financial, stock, bond, money and commodities included- has increased by the day. I find it interesting when people analyze the state of the economy, and the performance of companies in light of business and economic climate. I find it equally amusing by some of the dissection of numbers by the so-called analysts – not just in India- but the whole world over.
Consider this sample report on Biocon, which appeared in the website of Capitalmarkets.com when they published the news of their proposed bonus issue.
Amongst other things, the report said, and I quote,
"Biocon's net profit rose 497.8% to Rs 284.03 crore on 9.3% fall in net sales to Rs 194.19 crore in Q3 December 2007 over Q3 December 2006."
Does this make sense to the prospective investor? Quite unlikely, unless the reader is an expert in business and numbers. The person who has written this report is most likely to be one who knows how business is reported in numbers – a CA, an MBA or an ICWA. It will do a world of good for the analyst profession as well as for the reader and prospective investor if the following are taken care of, before the report is published.
1. The reporter needs to step back for a while, and think about who this report is intended for, and how the reader can understand this statement without the any other help. The prospective investor is most likely to be confused about how a company can earn Rs.284 crores nett profit on sales of Rs. 194 crores… my guess in this case is, there must have been a massive "other income" and not necessarily income from operations.
2. That then begs a follow-on question – how has the company fared in continuing operations? Have their earnings grown or diminished? Unfortunately, the report, as most other typical Indian reports, is completely silent on this. Income from operations, especially in a mature company, is a key indicator of how well the company is faring.
3. The same report also talks about Biocon acquiring a German company for 30 million Euros in an all-cash transaction, but again, no mention is made on how this cash-outgo is accounted for. Most OECD country accounting norms (including GAAP) advocate setting off the cash outgo in the same quarter and not amortize it. I guess the Indian laws are similar – I am awfully out of whack with the Indian laws at the moment, and am happy to be corrected in this regard- given that we are in an increasingly Globalized world and listings in NASDAQ required such Accounting norms to be followed.
4. Read the same sentence above on Biocon's earnings. I wonder if the reporter or Capitalmarkets.com would be pulled up for material misrepresentation of information, if they reported a profit of just Rs.284 crores, instead of Rs.284.03 crores! Will a prospective investor change his investment decision on Biocon if the earnings were only Rs.284 crores instead of Rs.284.03 crores?? I can understand an accountant reporting the numbers, but then materiality is a key requirement of any business report. Reporting numbers to the last two decimal places may well be the norm for any legal financial statement, but it need not be the case in a performance report or analysis.
Our brethren who aspire to become analysts with stock brokers or fund houses, could do well to follow some of the world media… not for the content, but for the way they present and analyze quarterly or annual results. The analysts quickly slice and dice the results, and come up with their interpretation of numbers – what has been the income from continuing operations, why have profits fallen, what is the future earnings guidance – in fact, investments are made or taken away based more often than not, on future earnings guidance than on last quarter performance.
In short, when one analyzes or reports a company performance one will need to think like a businessman/ businesswoman or an investor, rather than like an accountant. One has to bear in mind what information is materially important for a businessman or an investor, and investigate, analyze and report along those lines.
India's stock market is one of the oldest in the world, and one of it's biggest in volume terms (the biggest in Asia after Japan). The investment community and business community alike, needs quality information to make sound business/ investment decisions. As accountants and future accounts, let us strive to enable that.
Talking about reporting on business, all along I given to understand that only Indian media and analysts either did not know how to report coherently, or plainly manipulated information to suit vested interested.
After having lived outside India for more than a decade, and having followed the world markets and media reasonably closely, I have come to the conclusion that the media and analyst community elsewhere is no different.
Sample this – the US stocks have witnessed a mild rally in the week of 14th April. On 15th April, CNBC reported that Dow Jones closed higher, due to higher oil price !! Their logic? They claimed that higher oil price would lead to higher profits for the oil biggies. Right?
Wrong!! Hogwash!! All one has to do is to back in time. 1973. The so called oil shock is period resulted in a prolonged recession in the US, and bear market for stocks for 12 whole years !!! World oil prices are like onion prices in India – they can bring down governments! The fact is, when oil prices go up, it is the governments of the producer countries that reap a rich harvest. Yes, the companies who produce and refine oil gain too, but that is far less compared to what the Government earns by increased oil. And in the case of the US, profits increases for Exxon Mobil and Conoco Phillips, their two major oil biggies, can perhaps give their shareholders short term profit growth, but the consumers are going to be hurt badly by increased oil prices, and that will be a huge drag on the economy. And I am yet to see any stock market and stock prices that sustain an upward movement when the economy goes South.
In reality, what had happened was that the US Fed's moves to increase liquidity during that week in question made the bond prices unattractive, resulting in fund houses pumping more money into stock market than bond market.
- Dilip Subramanian
