• All blog entries
    • Calculators
    • Case studies
    • Cost of living
    • CPF Are You Ready?
    • CPF Matters
    • Credit Management
    • e-Learning
    • Estate Planning
    • Events
    • Financial advisers
    • High Networth
    • Insurance
    • Investments
    • Letters to the Press
    • Magazines
    • Others
    • Retirement Planning
    • Scams
    • Surveys
    • Tragic Stories
    • Unethical sales process
    • Videos
  • Legal
  • Testimonies
    • Individual testimonies
    • Gallery
  • My Account
Hi, looking for a fee-based financial planner in Singapore? Read this article now!
  • Home
  • About
    • About Wilfred Ling
    • Why do you run your own professional financial planning practice?
  • FAQs
    • FAQs on Wilfred Ling’s Financial Services
    • FAQs on Financial Planning
    • FAQs on Investments
    • FAQs on Insurance
    • FAQs on Estate Planning
  • Services
    • Overview
    • Create a financially secure plan for your young family (package details)
    • Retirement Planning
    • Investment Portfolio Management
    • Insurance Planning
  • Fees
  • Cool Tools
  • Contact
  • Subscribe
You are here: Home / Investments / Why this company has high profitability but still lose money?

Why this company has high profitability but still lose money?

30, October 2017 by Wilfred Ling Leave a Comment

One of my client asked me about a particular company that is listed in Hong Kong and Shenzhen.  She wanted to buy this company.

Company X2 (existing clients need to login to see the name) is not a small company. It has a market capitalization of HKD 173 billion or about SGD 30 billion. (For reference, the average market capitalization of the STI is 34 billion.) More than 90% of its customers are from China.

Recently, the share price surged like nobody business due to a market rumor that the chinese government will be introducing a new regulation that is in favour of this company . Here is a chart on how it surged:

Since the typical investor is to buy when price go up and sell when share price goes down, I am not surprise this company attracted the attention of many investors.

I do not think this company is a good investment. Here is why:

The annual report[1] showed that the company has a pretax profit of RMB 6.57 billion (page 47) in the year 2016. Yet, its operating cash flow for that same year was a negative RMB 1.85 billion (page 53).  Why is this so?

The main reason was a whopping increase of receivable of RMB 19.1 billion. What are receivables? Receivable occurs when a company recognize a particular sale as revenue but it has yet to collect cash from its customer. In year 2016, 58% of its current assets are in receivables. This is in contrasts to 2015 when receivable was 49% (page 49).

Footnote 23 shown that more than half of its receivables are more than three months old.  Its own auditor provided a compilation of the days receivable trend for the last 5 years as shown below (page 2):

 20162015201420132012
Days receivables1321161188683

As it can be seen that the days receivables have been increasing over time. Days receivables is calculated as receivable divided by revenue multiply by 365 days. It is the average number of days a company will take to collect payment from its customers. My own calculation of receivable for 2016 is 45,732,885 receivable / 100,207,703 revenue x 365 = 166 days. This is far higher than that provided by the annual report.

The increasing days receivable over the years imply that Company X2 is facing a continuing problem of collecting payment from its customers. The problem appears to be getting quite serious recently.

Some may ask, how can a company continue its operation when operating cash flow is negative? For this case, the company is supported by issuing shares and borrowings as shown below:

 2016 RMB’000
Operating cash flow(1,845,571)
Cash flow from investing activities(13,421,402)
Cash flow from financing:
...Proceeds from issue of a perpetual loan595,800
...Proceeds from issue of shares14,473,000
...Shares issue expenses(103,930)
...New borrowings31,223,339
...Repayment of borrowings(26,691,182)
...Interest paid(1,970,560)
...Perpetual loan interest distributed(185,155)
...Dividends paid to a non-controlling shareholder(51,690)
...Dividends paid to owners of the parent(1,001,228)
...(Increase)/decrease in pledged deposits(18,177)
Net cash flows from financing activities16,270,217

Interestingly, despite having negative operating cash flow, Company X2 continued to pay dividends to its shareholders. To be precise, it issued shares worth a total of RMB 14.4 billion and then paid more than RMB 1 billion back to shareholders. Does it make sense to take money from shareholders and then to return them? I am not surprised as many investors invest because of dividends. But actually, these dividends were simply part of their own money.

Lessons:

  1. It is possible for a profitable company to be actually making losses.
  2. The dividends shareholders receive could actually come from their own money rather than from the underlying business of the company.
  3. A share price can surge due to rumors instead of fundamentals.
  4. Investors always lose money. This is the rule of the game.

[1] Login required to see the footnote.

Like this article? Subscribe to my newsletter below for more.

Get regular Tips on Financial Planning. Free subscription for 3 years. Covers all aspect of financial planning such as 'How much salary you should have?', 'How to avoid insurance that is not suitable?", 'What are the retirement planning methods?", etc

Share this:

  • Tweet
  • Print

Related

Filed Under: Investments

What do you think? Leave a comment. Cancel reply


WILFRED LING, CFA

WANT TO GET REGULAR TIPS ON FINANCIAL PLANNING?

JOIN with thousands of other subscribers in getting tips on all aspect of financial planning such as "What is the minimum salary required?", "How avoid insurance that is not suitable", etc.


WILFRED LING IN THE NEWS

Click HERE to find out more.


THE KIND OF CLIENTS I AM LOOKING FOR

NEW TO US?

Learn how you can fully benefit from this massive website: HERE

For Registered Users Only (free)

  • How and what to invest now? (Webinar) 28/7/2022
  • How to identify high performing unit trusts in 3 steps (Webinar) 3/9/2021
  • Financial Planning – Christian Perspective Part 2 (Webinar) 14/8/2021
  • How and what to invest now? (Webinar) 22/7/2021
  • Financial Planning – Christian Perspective Part 1 (Webinar) 10/7/2021

View All

For Clients Only

  • Video Message to Clients 30/12/2021
  • Exclusive client-only Investment Update Webinar by Wilfred 26/11/2021
  • JPMorgan Guide to Market Q2 2020 15/4/2020
  • JPMorgan Perspective Q2 2020 15/4/2020
  • JPMorgan Guide to Market Q1 2020 5/2/2020

View All

Top Posts

  • Access Information & Sign Up Page
  • Strange way of how CPF Interest is calculated & retirement planning CPF has a rather strange way of calculating interest. I...
  • CPF: How to Accumulate $1m in your CPF by 57? I read online that there are people who wants to achiev...
  • Vanguard funds in Singapore at just US$ 20,000! Vanguard is the world’s most famous index fund provider...
  • AIA Pro Achiever 2.0 and my recommendations AIA Pro Achiever 2.0 was a product which someone recent...

Recent comments

  • Sinkie on Why Vanguard Fund Investors Underperformed The Fund Significantly?
  • Sinkie on Why You Always BUY HIGH In Investments?
  • honest_me on Cancer patient ends up with $33,000 bill after insurer refuses to pay for drug & what you must do to avoid this situation
  • susan on Single Premium NTUC Income SAIL
  • susan on Single Premium NTUC Income SAIL
  • LittleTiger on Nomination in insurance policies

To be notified of new blog post, like this facebook page

To be notified of new blog post, like this facebook page

Read articles based on different categories

Investment Login

iFAST Central: Login

iFAST Prestige: Login

Navigator: Login

Chartered Financial Analyst

CFA

Chartered Financial Consultant

ChFC

Featured Blogger

IM$avvy

© Copyright 2006-2022 Wilfred Ling

This advertisement or publication has not been reviewed by the Monetary Authority of Singapore

hollow-nasty
hollow-nasty
hollow-nasty
hollow-nasty