Yes. I understand that DTA/DTL occurs because of a timing differential. But that does not mean that it does not have an economic impact. In a future date, that DTL will eventually reverse and be a drag on FCF. Thus normalized FCF should be adjusted lower. If, for example, I run a business that generates $100m in EBT a year and operate in a 70% tax regime, I have to record a $70m tax expense. Say for example this is a startup and all my equipments are new, in order to maximize near term cash flow, I accelerate depreciation on my tax reporting book...and get a tax benefit of $70m...assuming no other working capital and mCAPEX = depreciation, the reported Free cash flow is $100m. BUT....in the future, because I accelerated the depreciation on my tax reporting book, I would be able to get the benefit of the added depreciation tax shield in future periods...thus say at year 10, while I may generate $100m in EBT and thus $30m in Net profit, under the same conditions except for equipments, I will record a Free cash flow of -$40m.
Thus one can see the mathematically calculated Free cash flow calculation is very flawed as it does not take into account of the fluctuation in working capital and taxes.
And to say changes in working capital will not affect Free cash flow is just plainly wrong. Consider an import/export company. The company has no real fixed assets, and the only assets the company has is its working capital...paying its suppliers first before receiving money from its customers. Thus to grow, working capital needs to grow. That growth in working capital is a drag on cash...and is certainly not free.
Another example....consider two company...yanlord and Far East organisation.
Yanlord gives its customers a 1000 year payment term (pay in 1000 years time) but charges them 10x more than Far East organization, which only give its customers a 10 days payment term. I realise this is quite far fetch but as Buffett said, the best way to test a theory is to push it to the extreme.
So both company record FCF ex. working capital of $100m. Are you seriously saying that they should be valued similarly, Assuming all else equal?
(14-08-2015, 01:33 PM)butcher Wrote: [ -> ] (13-08-2015, 04:31 PM)BlueDogMeow Wrote: [ -> ]Hi. None taken. DTL is a misnomer. The point is the economic reality of cash outflow is being understated. Even though the number is already that bad.
I did not say the cash outflow does not complie with accounting standards, I am saying that, similar to the Noble case, accounting information rarely match economic reality, and the economic reality for SinoG is massive cash outflow for seemingly no reason.
If I shift all of my trade receivables to other receivables, does it mean the business is better? No...it is just a restatement. Of course I can't prove that trade receivables are being shifted due to poor disclosure but the empirical data certainly points towards that direction. Of course one can say that other trade receivables does not have trade receivables in them, but that requires leap of faith I am u wiling to take, especially for a management team that time and again fail to keep their promises.
On a valuation standpoint, mechanically wise, SinoG is a short regardless of the growth potential.
(13-08-2015, 02:33 PM)butcher Wrote: [ -> ] (12-08-2015, 08:50 PM)BlueDogMeow Wrote: [ -> ]What terrible results. No news on IPOD. No news on debt repayment whatsoever even after ~3 weeks.
Here are a few interesting red flags.
Cash burn was $122m RMB. Here is the breakdown:
Receivables rose $160m. Not a single reprieve in receivables since the IPO. Rose from 165 days in Q4 2014 to 198 days today. That is a 33 days in 6 months.
inventories rose $124m, albeit some will argue this ride is seasonal.
A good portion of the payables SinoG drew down was repaid. This shows SinoG has no leverage against its suppliers.
Even though the company recorded a 66m tax charge, the company paid 31.5m. This created a deferred tax liability line item. Will be interesting to see if this DTL will get paid down.
SG&A rose 65.2% against a 14.5% move in inventories.
I shorted some SinoG a day before the results because it was a highly asymmetric bet.
Hi BlueDogMeow,
I hope you don't mind if I state my humble opinion on your statement. No offence, please don't take it hard.
The deferred tax liability ("DTL") are not resultant due to difference between tax expense in the profit and loss as compared to tax paid. You may refer to FRS 12 paragraph 15 to 18. A copy of FRS 12 attached. Income tax expense recognised to profit and loss consisted of tax on the relevant period plus any adjustments in respect of prior periods plus deferred taxation (which will include any adjustments in respect of prior period). You may refer to EY specimen financial statements disclosure notes on the attached pdf file page 94/234 for an idea. There are other Big 4 specimen FS available online also which users may also refer to. (I not from nor advertising for EY).
Generally, when carrying value larger than tax base, it gives rise to a taxable temporary difference which is multiplied by the applicable tax rate to derive the deferred taxation. In this case, a DTL.
Various other websites to understand deferred taxation (list not exhaustive) as follows:-
https://en.wikipedia.org/wiki/Deferred_tax
http://www.iasplus.com/en/standards/ias/ias12
Hi Blue, sorry no offence,
Just hope you understand the fundamental concept that Deferred Taxation arises due to timing differences due to differences in accounting and tax treatments. Cash out flows paid for tax will be offset against the provision for taxation account. These are widely applied almost globally no matter IFRS or GAAP.
I can't understand what are the reasons for the statement that 'economic reality of cash outflow is being understated' as mentioned.
With regards to your other statement that the company shifted receivables from trade to others. I think this is groundless statement and without merit. I thought I have pointed out in yesterday post that the company made disclosures on the decrease and increase in trade and other receivables which I think you had overlooked. The reasons can be found in the exact same announcement.
There are no shifting of amounts between trade and other receivables my dear friend.
Also wish to point out, any cash flows impacts due to trade & other receivables will also not impact free cash flows
An increase in trade & other receivables would translate to an increase in current assets and hence an increase in working capital.
An increase in working capital is Free Cash Flow to Firm ("FCFF") negative.
Calculations:
FCFF = Net Operating Profit after tax [or EBIT * (1-tax rate)] - Capex - increase in net working capital + depreciation (and any other non-cash expenses)
Why does SinoG classify "deposit and prepayment for property, plant and equipment in Hubei and Anhui plants" under "Other Receivables"?
I thought current receivables are outstanding amounts that a company would expect to receive payment for soon?
Does this mean that the "deposit and prepayment for property, plant and equipment in Hubei and Anhui plants" will be refunded to SinoG?
(14-08-2015, 01:33 PM)butcher Wrote: [ -> ] (13-08-2015, 04:31 PM)BlueDogMeow Wrote: [ -> ]Hi. None taken. DTL is a misnomer. The point is the economic reality of cash outflow is being understated. Even though the number is already that bad.
I did not say the cash outflow does not complie with accounting standards, I am saying that, similar to the Noble case, accounting information rarely match economic reality, and the economic reality for SinoG is massive cash outflow for seemingly no reason.
If I shift all of my trade receivables to other receivables, does it mean the business is better? No...it is just a restatement. Of course I can't prove that trade receivables are being shifted due to poor disclosure but the empirical data certainly points towards that direction. Of course one can say that other trade receivables does not have trade receivables in them, but that requires leap of faith I am u wiling to take, especially for a management team that time and again fail to keep their promises.
On a valuation standpoint, mechanically wise, SinoG is a short regardless of the growth potential.
(13-08-2015, 02:33 PM)butcher Wrote: [ -> ] (12-08-2015, 08:50 PM)BlueDogMeow Wrote: [ -> ]What terrible results. No news on IPOD. No news on debt repayment whatsoever even after ~3 weeks.
Here are a few interesting red flags.
Cash burn was $122m RMB. Here is the breakdown:
Receivables rose $160m. Not a single reprieve in receivables since the IPO. Rose from 165 days in Q4 2014 to 198 days today. That is a 33 days in 6 months.
inventories rose $124m, albeit some will argue this ride is seasonal.
A good portion of the payables SinoG drew down was repaid. This shows SinoG has no leverage against its suppliers.
Even though the company recorded a 66m tax charge, the company paid 31.5m. This created a deferred tax liability line item. Will be interesting to see if this DTL will get paid down.
SG&A rose 65.2% against a 14.5% move in inventories.
I shorted some SinoG a day before the results because it was a highly asymmetric bet.
Hi BlueDogMeow,
I hope you don't mind if I state my humble opinion on your statement. No offence, please don't take it hard.
The deferred tax liability ("DTL") are not resultant due to difference between tax expense in the profit and loss as compared to tax paid. You may refer to FRS 12 paragraph 15 to 18. A copy of FRS 12 attached. Income tax expense recognised to profit and loss consisted of tax on the relevant period plus any adjustments in respect of prior periods plus deferred taxation (which will include any adjustments in respect of prior period). You may refer to EY specimen financial statements disclosure notes on the attached pdf file page 94/234 for an idea. There are other Big 4 specimen FS available online also which users may also refer to. (I not from nor advertising for EY).
Generally, when carrying value larger than tax base, it gives rise to a taxable temporary difference which is multiplied by the applicable tax rate to derive the deferred taxation. In this case, a DTL.
Various other websites to understand deferred taxation (list not exhaustive) as follows:-
https://en.wikipedia.org/wiki/Deferred_tax
http://www.iasplus.com/en/standards/ias/ias12
Hi Blue, sorry no offence,
Just hope you understand the fundamental concept that Deferred Taxation arises due to timing differences due to differences in accounting and tax treatments. Cash out flows paid for tax will be offset against the provision for taxation account. These are widely applied almost globally no matter IFRS or GAAP.
I can't understand what are the reasons for the statement that 'economic reality of cash outflow is being understated' as mentioned.
With regards to your other statement that the company shifted receivables from trade to others. I think this is groundless statement and without merit. I thought I have pointed out in yesterday post that the company made disclosures on the decrease and increase in trade and other receivables which I think you had overlooked. The reasons can be found in the exact same announcement.
There are no shifting of amounts between trade and other receivables my dear friend.
Also wish to point out, any cash flows impacts due to trade & other receivables will also not impact free cash flows
Hi Butcher
thanks for the info.
If what you state is true, then it is quite obvious to me of someone's ploy.
Sino recovered to 29.5cts now. Cheers.
Oldman
(14-08-2015, 02:51 PM)Aldar Wrote: [ -> ]Why does SinoG classify "deposit and prepayment for property, plant and equipment in Hubei and Anhui plants" under "Other Receivables"?
I thought current receivables are outstanding amounts that a company would expect to receive payment for soon?
Does this mean that the "deposit and prepayment for property, plant and equipment in Hubei and Anhui plants" will be refunded to SinoG?
Would appreciate some answers from Butcher or Blue.
And hey Oldman, please do not be comforted by a recovery in share price.
Mr Market can be very wrong or very correct.
Ultimately we have to question the authenticity of the financials and business decisions of the managers.
(14-08-2015, 02:44 PM)Aldar Wrote: [ -> ] (14-08-2015, 01:33 PM)butcher Wrote: [ -> ] (13-08-2015, 04:31 PM)BlueDogMeow Wrote: [ -> ]Hi. None taken. DTL is a misnomer. The point is the economic reality of cash outflow is being understated. Even though the number is already that bad.
I did not say the cash outflow does not complie with accounting standards, I am saying that, similar to the Noble case, accounting information rarely match economic reality, and the economic reality for SinoG is massive cash outflow for seemingly no reason.
If I shift all of my trade receivables to other receivables, does it mean the business is better? No...it is just a restatement. Of course I can't prove that trade receivables are being shifted due to poor disclosure but the empirical data certainly points towards that direction. Of course one can say that other trade receivables does not have trade receivables in them, but that requires leap of faith I am u wiling to take, especially for a management team that time and again fail to keep their promises.
On a valuation standpoint, mechanically wise, SinoG is a short regardless of the growth potential.
(13-08-2015, 02:33 PM)butcher Wrote: [ -> ] (12-08-2015, 08:50 PM)BlueDogMeow Wrote: [ -> ]What terrible results. No news on IPOD. No news on debt repayment whatsoever even after ~3 weeks.
Here are a few interesting red flags.
Cash burn was $122m RMB. Here is the breakdown:
Receivables rose $160m. Not a single reprieve in receivables since the IPO. Rose from 165 days in Q4 2014 to 198 days today. That is a 33 days in 6 months.
inventories rose $124m, albeit some will argue this ride is seasonal.
A good portion of the payables SinoG drew down was repaid. This shows SinoG has no leverage against its suppliers.
Even though the company recorded a 66m tax charge, the company paid 31.5m. This created a deferred tax liability line item. Will be interesting to see if this DTL will get paid down.
SG&A rose 65.2% against a 14.5% move in inventories.
I shorted some SinoG a day before the results because it was a highly asymmetric bet.
Hi BlueDogMeow,
I hope you don't mind if I state my humble opinion on your statement. No offence, please don't take it hard.
The deferred tax liability ("DTL") are not resultant due to difference between tax expense in the profit and loss as compared to tax paid. You may refer to FRS 12 paragraph 15 to 18. A copy of FRS 12 attached. Income tax expense recognised to profit and loss consisted of tax on the relevant period plus any adjustments in respect of prior periods plus deferred taxation (which will include any adjustments in respect of prior period). You may refer to EY specimen financial statements disclosure notes on the attached pdf file page 94/234 for an idea. There are other Big 4 specimen FS available online also which users may also refer to. (I not from nor advertising for EY).
Generally, when carrying value larger than tax base, it gives rise to a taxable temporary difference which is multiplied by the applicable tax rate to derive the deferred taxation. In this case, a DTL.
Various other websites to understand deferred taxation (list not exhaustive) as follows:-
https://en.wikipedia.org/wiki/Deferred_tax
http://www.iasplus.com/en/standards/ias/ias12
Hi Blue, sorry no offence,
Just hope you understand the fundamental concept that Deferred Taxation arises due to timing differences due to differences in accounting and tax treatments. Cash out flows paid for tax will be offset against the provision for taxation account. These are widely applied almost globally no matter IFRS or GAAP.
I can't understand what are the reasons for the statement that 'economic reality of cash outflow is being understated' as mentioned.
With regards to your other statement that the company shifted receivables from trade to others. I think this is groundless statement and without merit. I thought I have pointed out in yesterday post that the company made disclosures on the decrease and increase in trade and other receivables which I think you had overlooked. The reasons can be found in the exact same announcement.
There are no shifting of amounts between trade and other receivables my dear friend.
Also wish to point out, any cash flows impacts due to trade & other receivables will also not impact free cash flows
An increase in trade & other receivables would translate to an increase in current assets and hence an increase in working capital.
An increase in working capital is Free Cash Flow to Firm ("FCFF") negative.
Calculations:
FCFF = Net Operating Profit after tax [or EBIT * (1-tax rate)] - Capex - increase in net working capital + depreciation (and any other non-cash expenses)
Sorry and noted
What I am trying to tell Blue are that even if by what he mentioned the management shift trade rcv to other rcv, it have no impacts on FCF.
Anyway, thanks and thumbs up! cheers
(14-08-2015, 03:10 PM)butcher Wrote: [ -> ] (14-08-2015, 02:44 PM)Aldar Wrote: [ -> ] (14-08-2015, 01:33 PM)butcher Wrote: [ -> ] (13-08-2015, 04:31 PM)BlueDogMeow Wrote: [ -> ]Hi. None taken. DTL is a misnomer. The point is the economic reality of cash outflow is being understated. Even though the number is already that bad.
I did not say the cash outflow does not complie with accounting standards, I am saying that, similar to the Noble case, accounting information rarely match economic reality, and the economic reality for SinoG is massive cash outflow for seemingly no reason.
If I shift all of my trade receivables to other receivables, does it mean the business is better? No...it is just a restatement. Of course I can't prove that trade receivables are being shifted due to poor disclosure but the empirical data certainly points towards that direction. Of course one can say that other trade receivables does not have trade receivables in them, but that requires leap of faith I am u wiling to take, especially for a management team that time and again fail to keep their promises.
On a valuation standpoint, mechanically wise, SinoG is a short regardless of the growth potential.
(13-08-2015, 02:33 PM)butcher Wrote: [ -> ]Hi BlueDogMeow,
I hope you don't mind if I state my humble opinion on your statement. No offence, please don't take it hard.
The deferred tax liability ("DTL") are not resultant due to difference between tax expense in the profit and loss as compared to tax paid. You may refer to FRS 12 paragraph 15 to 18. A copy of FRS 12 attached. Income tax expense recognised to profit and loss consisted of tax on the relevant period plus any adjustments in respect of prior periods plus deferred taxation (which will include any adjustments in respect of prior period). You may refer to EY specimen financial statements disclosure notes on the attached pdf file page 94/234 for an idea. There are other Big 4 specimen FS available online also which users may also refer to. (I not from nor advertising for EY).
Generally, when carrying value larger than tax base, it gives rise to a taxable temporary difference which is multiplied by the applicable tax rate to derive the deferred taxation. In this case, a DTL.
Various other websites to understand deferred taxation (list not exhaustive) as follows:-
https://en.wikipedia.org/wiki/Deferred_tax
http://www.iasplus.com/en/standards/ias/ias12
Hi Blue, sorry no offence,
Just hope you understand the fundamental concept that Deferred Taxation arises due to timing differences due to differences in accounting and tax treatments. Cash out flows paid for tax will be offset against the provision for taxation account. These are widely applied almost globally no matter IFRS or GAAP.
I can't understand what are the reasons for the statement that 'economic reality of cash outflow is being understated' as mentioned.
With regards to your other statement that the company shifted receivables from trade to others. I think this is groundless statement and without merit. I thought I have pointed out in yesterday post that the company made disclosures on the decrease and increase in trade and other receivables which I think you had overlooked. The reasons can be found in the exact same announcement.
There are no shifting of amounts between trade and other receivables my dear friend.
Also wish to point out, any cash flows impacts due to trade & other receivables will also not impact free cash flows
An increase in trade & other receivables would translate to an increase in current assets and hence an increase in working capital.
An increase in working capital is Free Cash Flow to Firm ("FCFF") negative.
Calculations:
FCFF = Net Operating Profit after tax [or EBIT * (1-tax rate)] - Capex - increase in net working capital + depreciation (and any other non-cash expenses)
Sorry and noted
What I am trying to tell Blue are that even if by what he mentioned the management shift trade rcv to other rcv, it have no impacts on FCF.
Anyway, thanks and thumbs up! cheers
Actually I agree that Blue is hasty and irresponsible to claim that the management shifted trade receivables to other receivables.
But I'm just puzzled by the increase in other receivables which was attributed to prepayments and deposits which I thought should not be refundable.
(14-08-2015, 02:51 PM)Aldar Wrote: [ -> ]Why does SinoG classify "deposit and prepayment for property, plant and equipment in Hubei and Anhui plants" under "Other Receivables"?
I thought current receivables are outstanding amounts that a company would expect to receive payment for soon?
Does this mean that the "deposit and prepayment for property, plant and equipment in Hubei and Anhui plants" will be refunded to SinoG?
Sino Grandness was not wrong in putting deposit, prepayment, advance payment in "other receivables".
Tat Hong does the same, as in pg 118 of its FY 2015 annual report.
If you have the time, you may read up annual reports of other companies.
(14-08-2015, 03:05 PM)Aldar Wrote: [ -> ] (14-08-2015, 02:51 PM)Aldar Wrote: [ -> ]Why does SinoG classify "deposit and prepayment for property, plant and equipment in Hubei and Anhui plants" under "Other Receivables"?
I thought current receivables are outstanding amounts that a company would expect to receive payment for soon?
Does this mean that the "deposit and prepayment for property, plant and equipment in Hubei and Anhui plants" will be refunded to SinoG?
Would appreciate some answers from Butcher or Blue.
And hey Oldman, please do not be comforted by a recovery in share price.
Mr Market can be very wrong or very correct.
Ultimately we have to question the authenticity of the financials and business decisions of the managers.
From the details given above which are also found in the announcement, "deposit and prepayment for property, plant and equipment in Hubei and Anhui plants" in my understanding are amounts prepaid for purchase of PPE which have yet to be delivered notwithstanding other facts. Upon the delivery of PPE and commissioned/installed and ready for intended use, the management will thus recognise the entire purchase costs as additions of PPE which then the deposit/prepayment for the PPE will be reclassified to PPE under NCA. The exact details can be checked with the management. Can just email them bah.
Hi Aldar
Quote:
But I'm just puzzled by the increase in other receivables which was attributed to prepayments and deposits which I thought should not be refundable.
Based on my understanding, so long as there is underlying value in the prepayment and deposits, it will be taken up in the balance sheet. Examples such as prepaid property tax, prepaid insurance, rental deposits, deposits on contracts, deposits on utilities. These are captured as assets in the balance sheet (broadly other receivables, prepayment and deposits) as they have values to the business, bounding on the other parties to some obligation work/duties. It does not matter whether they are of refundable or non-refundable nature.
Whether the item is refundable or not depends on the terms of the contract between the two contracting parties.