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 : http://sharesansar.com]

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.

Butwal Finance Ltd. : Usage of "provisions for losses" and "write-backs"

Provisions for losses are made by companies to smoothen out the huge and sudden impact bad debts, other unrecoverables ( default in accounts receivables) and unforeseen mishaps cause on the performance of the company. If the provisions are made for mishaps or unrecoverables assumed to take place in the next quarter, then they may be added back in the next quarter financial statement as write-backs. If the provisions are to smoothen out events of huge cash or property loss in the long run, the immediate write-backs are not done.

In my last post, I discussed about how Janata Bank was distributing the "provisions for losses" over several quarteers to give a perfect performance picture of the quarter just before the IPOs were offered. It had cleverly assigned maximum provisions for losses for the quarter previous to this.

I was going through the income statement of Butwal Finance Ltd. and saw a similar situation.

Statement Source : www.sharesansar.com

The interesting facts to notice in the income statement were the "provisions for losses" and their "write-back" segment. In the previous quarter, when the reported losses is huge, surprisingly a large "provisions for losses" - Rs.7,710,000 was accompanied by very small "write-back"-Rs.93,000. Compare this with a relatively small "provisions for losses" -Rs.5,982,000 accompanied by a large "write-back" -Rs.4,980,000.

The above action is raising the profits of the present quarter and decreasing the same for the previous quarter. Like the Janata Bank statements, Butwal Finance Ltd. too is leveraging the previous quarter to produce better results for the present quarter. This act ensured that the company had profits before tax and thus enabling employees to bonuses, although the company is literally under loss( if "provisions for losses" and "write-backs" for present quarter were similar to that for present quarter).

These two segments in the income statement of two quarters may be genuine, but the varied amount of these segments written for two consecutive quarters do signal the huge probability of mal-practices in income statement reporting. One of the benefits of such mis-reporting is the availability of bonuses for the employees. So, does anyone sense a conspiracy here?