Saturday, June 23, 2012

The Curious case of Buwal Power Company (BPC)

Although management gurus always start with the assumption that the market is full of rational investors, it is hardly the case in reality. Everyone is biased due to the company reputation, management reputation, information interpretation, etc. At the end its more about behavior of the investors rather than the performance of the company that decides if the company is going to sell like hot-cake or go down in the history books.

Examples to prove these seem to be omnipresent in Nepal. I did talk about few of them in previous posts.

I was going through the financial statements of  Butwal Power Company(BPC), regarded as one of the most stable investments in Nepal. I was shocked to see their Current Ratio(CR) just below 1. For any company, this is a warning signal. Although, BPC is quite stable in terms of its revenue sources, but playing with CR is not a serious thing to do.

BPC Financial Statement  [Source :]

Current Ratio is the ratio of current assets to current liabilities. Plainly saying, CR is the ratio of how much you got/have in the given period in terms of cash or assets that can be en-cashed within a year to how much you have to give/pay in the given period in terms of liabilities/obligations.

So, if your CR is lower than 1, it means you owe more to others than others owe to you. In case, the people or companies that you owe the money, i.e. basically the suppliers and lenders ask for all the money, than you can't give them by just handing them the money you receive from the people who owe money to you. You will need to sell long term investments and/or fixed assets like land, equipment or take more loans.

This will implications on the performance of the company. Selling fixed assets is not a good sign. It will lead to decrease in productivity. Similarly, taking extra loan just to meet present obligations is not a sustainable act. Also, with extra loan, you get extra interest to pay. So, the current liabilities increase further.

Although a one quarter result doesn't give a full picture, investors do need to question the authority about this number.

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