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QuestionsCategory: Financials QuadrantTaking apart Micro Mechanics’ Financial Statement
Victor Lee asked 2 years ago

Hi Victor and Jieren,
 
I was going through Micro Mechanics FY2018 statement and noted the following:

  • There is an additional line in Current Assets and Non-Current Assets called Right-of-Use Assets. Presumably these are the leased assets because an equal but opposite sum is applied to the Leased Liabilities. Since this item was not reflected in past years’ balance sheet, its inclusion in the FY2018 balance sheet creates a dilution effect on the ROA. Therefore when using the sample spreadsheet, should this item be removed from Current Assets and Total Assets?
  • There is no Retained Earnings stated in the financial statement. But it seems like Reserves are actually the Retained Earnings?
  • The FCF per share exceeds the dividend per share for the past few years. Does this mean that the company has been funding its dividends from its past earnings and therefore such measure cannot be sustained in the long run?
  • Is CAPEX  = Purchase of Plant, Properties and Equipment (PP&E) or is CAPEX = (Purchase of PP&E – Proceeds from disposal of PP&E – Interest received)? Reason for asking is because the purchase of PP&E may potentially be partly funded by the disposal of other assets and interest received.
  • The sum of net cash for investing activities and dividends paid is greater than the net cash from operating activities for the past years. But yet there is an increase in the Reserves in the Income Statement every year. How is that possible? Shouldn’t the Reserves decrease to make up the shortfall?

Apologies for the numerous questions and many thanks for taking the time to clarify.

Regards,
Victor

Ang Chor Loo replied 2 years ago

Hmm…if everyone dun mind, I try to answer some of the questions…

Q1. Yes, u should remove that item to compare ‘apple for apple’ before concluding that ROA is up/down. Shouldn’t be regarded as dilutive/accretive, from my perspectives.

Q2. I assume u are looking at Balance Sheet. In this case, retained earnings would be accumulated profits.

Q3. FCF was lesser than dividend for FY18 but was greater in FY19. For FY18, part of the payout came from its past earnings (cash & equivalent). Not sustainable in Long run. However, in short run, without using debt, it is actually returning excess funds to shareholders.

Q4. I would only consider purchase and disposal of PP&E but will also study if this is consistent or one off basis.

Q5. Operating/investing/financing under cash flow statement impacts cash & cash equivalent directly. Unsure about the mentioned reserves under Income statement though. Or are u referring to Foreign currency translation reserves?

1 Answers
Victor Chng answered 2 years ago

Hi Victor,

You will only learn from constant asking questions so keep your questions coming. I am more than happy to answer it.

 

I think most of the questions had been answer by Chor Loo. Great job Chor Loo :)

 

Let me answer some of the questions below:

Q1: Right-of-Use Assets was due to the change in account standard. Hence moving forward, it will be a common practice. Hence, you should not removed it from the balance sheet.

 

Q4: For Capex, just use the purchase of property, plant and equipment.

 

Q5:If you notice Micro-Mechanic, they tend to pay out whatever left after capex as dividend to investor as the business does not need a lot of capital to operate it. As for the reserve, they don’t appear in income statement. Hence, it is as what Chor Loo mentioned, you may be looking at foreign currency translation reserves.