Tuesday, 24 March 2009
Companies must reveal more in financial results
The earnings reporting season is a key event for shareholders as this is their opportunity to know and evaluate the companies’ performance and outlook. This is even more so in the current challenging business environment where stockholders need greater clarity and assurance from companies on their business operations.
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Companies must reveal more in financial results
By OH BOON PING
24 March 2009
The earnings reporting season is a key event for shareholders as this is their opportunity to know and evaluate the companies’ performance and outlook. This is even more so in the current challenging business environment where stockholders need greater clarity and assurance from companies on their business operations.
So, for sure, investors won’t just be looking at the profit-and-loss numbers, but will also zoom in on the business and the soundness of the companies as presented in the results commentary.
Unfortunately, the importance of all this seems to be lost on a number of Singapore-listed companies - in particular, the small ones that often keep their results analysis and comments on the business outlook to a bare minimum.
In its H1 2008 results announcement, for example, Digiland International, which reported a loss of US$1.6 million, did not offer its investors much insight beyond pointing out some key changes in its income statement.
Its income statement review reads: ‘Personnel expenses reduced from US$909,000 to US$738,000 due to rationalisation of the operations throughout the group. Intangible asset of US$208,000 has been fully amortised. Exchange loss is a result of the strengthening of the US dollar. As a prudent measure in this uncertain economic condition, the group made a provision of US$473,000 for slow moving inventory.’
That’s all. There was no mention of why revenues were nearly flat at US$19.6 million or a breakdown of its turnover based on markets and sectors.
Others such as New Wave Holdings fared slightly better in that they highlighted the key factors driving the top line for the reporting period.
In New Wave’s case, the company identified the significant contribution from its Malaysian subsidiary MNPL Aluminium Centre as a key reason for its 32 per cent revenue jump in H108 compared with the year-ago period, when the subsidiary had just commenced operations.
That helped explain the surge in revenue. But the announcement still fell short in that the management failed to provide sufficient analysis of the operating environment, beyond stating the obvious - that it would be challenging for all its business divisions in the coming months, and that it would monitor the situation closely.
Vague comments and platitudes are not going to help shareholders and would-be investors assess the prospects of the companies and make decisions on their investment portfolios.
Granted, some companies may find it more worthwhile to communicate additional details through closed-door sessions with analysts, as a number of retail investors still base their decisions on research reports.
But the practice of selective disclosure certainly goes against the principle of corporate transparency, and puts those investors who do not have access to such reports at a disadvantage.
Instead, these firms should take a leaf out of Noble’s book. Healthy revenue growth of 54 per cent aside, commodity-based Noble Group’s results announcement stands out for its high levels of transparency and financial results analysis.
Its management discussion & analysis (MD&A) spans 20 pages offering details of its business strategy, current investments, a breakdown of revenue and profits based on its key business units, and the driving factors and trends in each sub-sector.
Under the agricultural segment, for example, Noble further refined its analysis to look at performance in its grain, coffee, cotton, cocoa and sugar sub-divisions. Year-on- year revenue and profit numbers were reported, while comments on the market conditions were also made.
The group also monitored its business risks using value-at-risk (VAR) - a risk measure - as a percentage of its equity, and showed how it has changed over the months.
And if that’s not enough, its investors can listen in on a teleconference where they are free to ask questions, and have access to presentation slides that are available for download.
Of course, detractors can argue that such a high level of corporate disclosure comes at a cost, and the money could have been better spent elsewhere.
But if that’s how the management feels, then the company had better be taken private since accountability to public investors is a cardinal rule which must not be breached.
Managements of listed companies need to realise this: investors have the right to know the background information on their financial results, and the companies have to ensure such information is disseminated fairly.
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