I was looking at Pico and have the following questions:
- Trade receivables: when analyze a company, is it better to use trade receivables or trade receivables minus the allowance for bad debt? What is the rationale?
- Pledged bank deposits: sometimes, I come across pledged bank deposits under the balance sheet. When calculating the net debt or the net cash position, is it better to include / to exclude the pledged bank deposits? What is the rationale?
- Financial lease obligation: I also come across this quite often in the financial position. Should we include this when calculating the total borrowings? What is the rationale?
- Capital raised & capital returned: when calculating the capital raised/returned, should we consider 1) capital contribution from non-controlling shareholders, 2) purchase of remaining shareholding from non-controlling interests, and 3) dividends paid to non-controlling shareholders?
I find Pico is a bit expensive as it has caught up the PE of Kingsmen Creative. What do you think?
Let me reply your questions below:
- Stick to Trade Receivables as this is the official formula. If the company has too much bad debt, then likely there is insufficient due diligence being carried out on the creditworthiness of the customers. Ask the management why is that so…
- Include pledge deposit as this cash still belongs to the company
- Do they have financial footnotes? Is the amount significant? Do you have any specific examples?
- Yes, I usually include these numbers.
For Pico, I have not done the analysis on it yet but I think Victor can share with you his opinion as he looked at the company before. :)
The case I encounter on financial lease obligation is with Pico. In their case, the lease obligation is for fixtures and equipment. It does mention there is an interest rate associated with this. The total lease obligation, when compared to total borrowings, ranges between 3-14% from year 2005 to 2016, except for year 2015 where it went up to 300% as the debt level was really low (HKD 550k financial lease to HKD 186k borrowings).
At which point should we start to consider the financial lease obligation? Thanks.
I extracted the note for our discussion here.
It is the Group’s practice to lease certain of its fixtures and equipment under finance leases. The lease term is usually three to five years. For the year ended October 31, 2016, the average effective borrowing rate was 3.99% (2015: 4.96%) per annum. Interest rates are fixed at the contract date and thus expose the Group to fair value interest rate risk. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments
I would consider it as a debt since they are effectively paying interest on this. However, this amount is relatively insignificant for the FY2015/16. So you can literally ignore this number.
Pico and Kingsmen are rather similar companies in nature just that one is dominating in China and the other is in Singapore. You are right that the valuation of Pico is much higher than Kingsmen. In normal condition, Pico should always trade slightly higher than Kingsmen because they are the larger company.
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