Watch the cash flow
AS the earnings season unfolds, indications are that this quarter is generally a good one for listed companies.
Profits are generally up as many companies are reaping the benefits of the gradual opening up of economic activity across the globe.
However, aside from paying attention to the revenue and net profit numbers, one ought to also pay close attention to the cash flow statement of companies.
This fundamental rule is sometimes forgotten by investors. For example, in the case of beleaguered oil and gas firm Serba Dinamik Holdings Bhd, the company had previously reported spectacular revenue and profit growth numbers.
In the four years since its listing in February 2017, Serba Dinamik had reported a fourfold increase in its revenue and profits. However, the story was different with its cash flow.
Cash flow is important as it is needed to fund the running of companies. Cash flows indicate how well a company is going to handle its cash expenses such as working capital and dividend payments.
In Serba Dinamik’s case, its net cash flow from operations had deteriorated to negative levels due largely to having high receivables.
So while its revenues and profits were rising, so too were its receivables and that naturally raised a lot of questions.
Consider also the case of one listed technology company.
It has been reporting very healthy revenue and profit growth numbers. It recently reported its best ever quarter and its share price had gone stratospheric since the middle of last year.
The company had said the rise in earnings were on the back of higher sales volumes and improved operational efficiency.
However, a look at the company’s cash flow statement reveals that it has significant negative cash flows.
Trade and other receivables were even higher.
It’s revenue at RM165mil for the nine months ended Dec 31, 2021 was double from a year ago. But during that period, it went into negative cash flows of some RM90mil, compared with a positive cash flow of RM14mil a year ago.
Its trade receivables stood at an eye popping RM139mil. It is important to know why the receivables are so high.
Does the company have a problem collecting payments for goods and services rendered and if so, how is that being fixed? Or is there more going on?
Upskilling requiredOF late, there have been several announcements of changes in key roles at local banking groups.
More than a change of names and faces, what is most important is that the change results in “the right man and woman for the job.”
Roles at traditional banks have changed quite a bit. Critical roles within the banking sector now require more than just finance knowledge (fintech), experience and a network of contacts.
In fact, what is more necessary now is knowledge in the area of technology.
According to a report by United Kingdom-based Centre for Finance, Technology and Entrepreneurship, at fintechs – which fight with banks for talent and business, 80% of jobs on average, are jobs that are similar to jobs at actual tech companies.
In the same vein, as traditional banks began to transform themselves to become more and more digital, new hires must be digitally-savvy while there must be constant retraining and upskilling of skills for the ones who have worked there for decades.
This should be across the board from the C-suite roles right down to the lower-level positions.
These days, it has become a norm of sorts to hear about banks having issues with their tech systems which result in much inconvenience for customers and worse still in some cases, losses.
Whether or not these are due to the lack of technical knowledge and expertise on the part of a bank’s overall workforce is debatable.
But brand trust is one thing that industry observers always say incumbents have over fintechs and the other new kids on the block.
Once that is gone, the playing field becomes as level as it can get.