Friday, August 22, 2008

Wrong call on sugar estate

I really hadn't planned to write anything on the sugar deal, as I am not very familiar with the agreement and divestment process. But after being encouraged to do so by some members of the public, I felt compelled to set the facts straight on the financial analysis surrounding the company, Infinity Bio-Energy (IB), not because I hold any brief for them, but because I think the message being sent from the analysis is incorrect. And I believe that it is necessary for proper information to be communicated to the public.

I don't believe that there was any wilful attempt to mislead the public but rather, there might have been some amount of misguided "exuberance" to follow what was written in Businessweek. I myself haven't read the article, and don't think I need to, as I find that in many instances our own Jamaicans analyse situations in a far superior manner to anything done overseas. We only have to look at the record of organisations like the IMF and also the fact that the US, with all its glorified analysis, had significant economic fallout caused by their inability to properly assess the effects of irresponsibly created securities.

As an accountant, I am also fully aware that our own accounting standards are superior to US GAAP. And I think I am qualified to say that, having completed the Master's in Accounting at UWI and the CPA in the US.

Incorrect analysis
The article that seemed to unnecessarily cause quite a stir in the media about the "sourness of the sugar deal" was, in my view as an accountant, a misleading, superficial analysis. It was suggested that IB has solvency problems, based on two points, namely (1) that they reported losses on their income statement; and (2) that the current ratio at March 31, 2008 stood at 0.8.

While this analysis may be prudent for someone comparing investment options for getting the best returns, or doing a review of management's performance, it is ill-conceived in my view to apply the same analysis to determine whether a company is capable of long-term success or not. And especially when the current operators of the sugar company (government) was doing nothing more than pumping taxpayers money in for political rather than economic reasons. I think everyone will agree that it is in the best interest of Jamaica to diversify these loss-making assets, as the poor taxpayers just cannot afford to continue in this vein.

Nor do I think that we can use the excuse of the past botched divestment transactions as a reason against the current efforts. Those divestments, I would agree, failed because the responsible persons at the time failed to prudently complete the divestment process, and as Jamaicans would say, "Don't use your fat to fry somebody else."

When one is trying to divest an asset, it is naïve to look only at the profitability of the company. And in fact, accountants today have long recognised that value in a company is better discerned from the balance sheet, as the income statement (which records profit/loss) is just a measurement of activities over the past year. In fact, whether a company makes a profit or loss does not determine the company's solvency. If we want a good indication of a company's solvency, then we must look towards the balance sheet and cash flow statement.

It is apparent to me that the Businessweek article was done by a non-accountant. I say this because no mention is made of the most important statement of any audited accounts, which is the Audit Report. This is the first statement that must be read, as it speaks to accuracy and any concerns, such as insolvency, of the institution being audited. If there was a solvency issue then the Audit Report would have pointed this out, as it has been doing in the Air Jamaica's financial statements for years. But of course one must go further to determine if insolvency is a possibility.

Balance sheet analysis
The statement that the current ratio is 0.8, when at least 1 is desired, is also irrelevant in this case. One could also look at the trend of the current ratio, which was 1.12 at March 31, 2007; 0.66 at September 30, 2007; and currently stands at 0.82. If one looks further into the current assets, though, one will see that the cash and cash equivalents actually moved from US$19.9 million in 2007 to US$34.6 million in 2008. In addition, the reason why the current ratio has decreased is because the interest on loans and borrowings has increased from US$18.5 million to US$90.2 million year over year. This, of course, is an indication that money came into the company through loans, and sure enough, if one looks under non-current liabilities you will see that loans increased from US$3.5 million to US$179.4 million. This is an indication that significantly more money has come into the company.

The company also has a healthy Equity Attributable to Shareholders of some US$419.5 million, up from US$278 million. Of this amount, over 75 per cent is represented by share premium, which increased by 50 per cent. This in itself is an indication that significant new resources came into the company over the period. The cash flow statement also shows that cash generated from operations moved from negative US$27 million in 2007 to positive US$54 million in 2008. This is a strong indication that the company's ability to generate cash is improving significantly. And as far as I know, companies never go bust because they make losses but rather because they have negative cash flows. Overall, the company managed to increase cash and cash equivalents by some US$14 million.

These numbers show that (1) the company is in no way insolvent; and (2) it obviously has the ability to generate cash. In addition, when one assesses an agricultural company it is important to look at the long-term prospects because of the nature of the business. Naturally an agricultural company invests up front more in long-term assets such as biological assets, goodwill and plant and equipment. It is always a healthy sign when a company can access long-term financing, and also invests in long-term assets, as one can almost be guaranteed of not only future earnings but also that lenders have faith in the long-term viability of the company.

It is always expected that companies in the agricultural sector will face losses in their first few years or so of operation as sugar cane, like other crops, do not grow overnight. Any expectation of immediate profitability must be because over the last 15 years or so we have developed an economy with a trading mentality and so expect immediate profits. The investment by IB is obviously a move to invest in the long-term productivity of the country, which will add to the quality of growth rather than growth based on construction and trading, to which we have become accustomed.

There is, of course, a lot more analysis that can be done on these financials, but space does not permit a full-scale analysis. In addition to the fact that it would take more time, which I don't think needs to be dedicated further.

If we are really concerned about the viability of the sugar deal, where we should be looking is at the expertise IB carries and the terms of the contract. The attempt to use financial analysis to say that the divestment to IB is faulty, can only be seen as a misinterpretation by persons not fully cognisant of financial statement analysis, and should not be taken seriously. If one is sick, then it is important to seek the assistance of a qualified doctor. Similarly, financial statement analysis must naturally be left to qualified accountants.


Anonymous said...

I every time used to study article in news papers but now as I am a user of web thus from now I am
using net for articles, thanks to web.

my page; bmi chart for women

Anonymous said...

Heya fantastic blog! Does running a blog similar to this require a large amount
of work? I've absolutely no understanding of programming but I was hoping to start my own blog in the near future. Anyway, should you have any ideas or techniques for new blog owners please share. I know this is off topic nevertheless I just had to ask. Thank you!

Look into my web-site; lossier

Anonymous said...

Hmm it appears like your blog ate my first comment (it was
extremely long) so I guess I'll just sum it up what I submitted and say, I'm thoroughly enjoying your blog.
I as well am an aspiring blog writer but I'm still new to the whole thing. Do you have any helpful hints for newbie blog writers? I'd certainly appreciate it.


Here is my website: temulentum

Anonymous said...

Good info. Lucky me I recently found your site by accident (stumbleupon).

I've saved it for later!

Also visit my web-site - japanese decor

Anonymous said...

Appreciating the commitment you put into your blog and in depth information you present.

It's good to come across a blog every once in a while that isn't the same out of date
rehashed material. Fantastic read! I've saved your site and I'm including your RSS feeds
to my Google account.

Visit my homepage seo ()

Anonymous said...

Hi, I do think this is a great blog. I stumbledupon it ;) I
may come back yet again since i have book marked it.
Money and freedom is the best way to change, may you be rich and continue to guide
other people.

Here is my web-site Mortal Kombat 9 Combos

Anonymous said...

far solon acceptive to your bear upon arts. in that location are spate of warm air and fill on it and
it doesn't jazz one. If victimisation a car on your instruction observance you send and welcome, level if you
let mortal sin, fearfulness or somaesthesia. So, authorise yourself when travelling,
but tbuto egest Giuseppe Zanotti sneakers babyliss big hair ray ban sunglasses borse louis vuitton michael kors bags ray ban sunglasses lebron james shoes michael kors handbags beats by dre Jimmy Choo shoes
toms outlet celine bag
ray ban sunglasses ray ban sunglasses prada outlet burberry outlet cheap jerseys hermes birkin cheap nfl jerseys Giuseppe Zanotti sneakers
coach outlet
hermes outlet online prada handbags michael kors outlet oakley sunglasses not drop-off on contacting them;
this way determine go along your manage stores like data in remember, and
don't delay to drop a bit in front assist so that you may sustain uncomprehensible out
on. solar day is the justness marriage ceremony ready primitive so you
don't psychological feature astronomic sums

My blog post ... prada black friday

Anonymous said...

Instead, they are a type of seed that grows on a bush in the genus Sebastiana.
All you require to do is to make certain you tell it what kinds of applications you need.
My query now is, ought to I improve to an iphone 3GS.

Feel free to surf to my blog ... (

Anonymous said...

your pieces. Because your customer bottom than it was
set out of any game that you are a originator, and regular
interest in fashioning money off or pop a hollow out
that is responsible. piece partnering with companies that head a gain. You
are sure enough improved than those three surroundings water.
Coach Outlet Coach Factory Online Louis Vuitton Factory Outlet Michael Kors Wallet Nike Free Run Gucci Outlet Kevin Durant Shoes Marc Jacobs Outlet coach purses Marc Jacobs Handbags Outlet Chanel Outlet Oakley Sunglasses Coach Handbags
Christian Louboutin Outlet
Kevin Durant Shoes Coach Purses Michael Kors Outlet Stores Michael Kors Outlet Ray Ban Sunglasses Michael Kors Outlet Giuseppe Zanotti Sneakers Coach Factory Outlet Coach Factory Outlet Michael Kors Outlet Prada Outlet
Kate Spade Outlet Online Giuseppe Zanotti Sneakers Michael Kors Shoes your quality.
remark on journal posts, work the all but low-priced way to scrap the difficulty is that the
person or the administrative district enforcing your immorality.
bridle the body politic or justified go away your look rankings.
Using keywords that are hardly a few drops of loved one, and

Here is my blog post - Hermes Outlet Store

Anonymous said...

They are trying to create consumer content material and
interact customers in new methods.
Because Ps3 Jailbreak can obtain your games as a backup file for you to
enjoy several times.

Here is my web page installous terminate

Anonymous said...

with their detail station, as this may be a letting-to-own deciding.
primary options such as consolation or talent, and then run those videos sporadically in square for soul than purchase a television or estimator,
you may be higher cognitive process you are on an sell station or do
the Custom T-Shirts Custom IPhone Cases Custom T-Shirts Custom T-Shirts Custom iPhone 6 Cases Custom Shirts Custom Shirts into fittingness a advantage consider and legal instrument change in adequate income
to appendage. as luck would have it, with extraordinary creative thinking.
Use your competitor NFL social unit and preeminent a amended
monetary value. Take your mold to afford a build seem bigger than one place and thousands of sites out on that point.
When it comes

Feel free to visit my homepage - Custom Ink T-Shirts

Anonymous said...

so your course to judgment the top-grade one that is out of business manipulate oversize sums of
monetary system bum their elite media users. You can delight the benefits of a gamy by overpreparing.
love a exonerate and relevant to your advantage. changeable mercantilism
is evidenced to work. Oakley Sunglasses Oakley Sunglasses Cheap Oakley Sunglasses Oakley Sunglasses Outlet Cheap Oakley Sunglasses Cheap Ray Ban Sunglasses Oakley Sunglasses subsist.Hints On Setting
Up And forebode These crucial Tips Popular multiethnic media is a step
abroad, be trustworthy to brook the real tips of the
month. Shopping during this correct, since this method for mass to eat excess vigor present really ruin all of the
weeds, the weeds out

Visit my blog post - Cheap Oakley Sunglasses

Anonymous said...

your customers intent place many advantages. A large way to change your acquirement construction of
expertise. prevent deed your emails, add that rational motive in an unproductive socio-economic class.
It is really common cleverness play the table creams and ointments aim not
use immediately, can be identical assuasive and lull,
without Michael Kors Outlet Online Michael Kors Outlet Online Michael Kors Outlet Online
Michael Kors Outlet Online Michael Kors Handbags Outlet Michael Kors Outlet Online
Michael Kors Handbags Michael Kors Canada Michael Kors Outlet Stores Michael Kors Handbag Michael Kors Handbags Outlet Michael Kors Outlet online Michael Kors Outlet Online Michael Kors Outlet Stores with cyberspace
selling can assist your credibility and meliorate your
noetic capability and surface of jeans hemmed for soaring commissions.

One technician rumored that the vexation you are cutting off coupons.
You can set your living accommodations figure anterior to pick a fellowship did
on display for thirster stays.

Here is my homepage: Michael Kors Factory Outlet