03-03-2011, 10:32 AM
isaac Wrote:...fishy low interest earnings...
...Is there really something fishy, or is my overactive mind thinking too much?
This cash-but-low-interest issue was raised many years ago by a CLSA analyst regarding People's Food. Apparently the company threw a fit and supposedly banned him from future briefings.
The trouble with reconciling cash balances with interest earnings is that cash is shown as of a particular date, while interest is earned over a period of time. If a company is using its cash actively, there may not be much cash sitting in the bank on any given day as the cash is used to buy raw materials, pay employees etc and is later regenerated when customers pay. The company could even incur interest charges if seasonal working capital needs require it to take on short-term loans which are repaid by the end of the reporting period, whereupon it shows no debt but has incurred interest costs.
That said, if a company clearly has excess cash balances especially after a capital raising, it would be sensible to assume meaningful interest income since that money should be sitting around in the bank until it is actually used. An annualized interest rate of less than 1% today in China is probably too low and definitely a cause for concern, especially if the situation of high cash balances and low interest earnings has persisted over a couple of years.
As a side note, today's Straits Times has an article on suspended counters titled Investors left out in the cold. The list shows 17 counters, of which 11 are clearly Chinese in origin. Enough said, I think.