Posted by Alphabeta > 2015-05-28 09:24 | Report Abuse

Just to highlight a few points why cash flow is more reflective on the quality of earning, in FY 13 VS has acquired additional 17.19% shares in VSIG for RM32.77 million satisfied in cash, increasing its ownership from 38.06*% to 55.25% resulting in VSIG being consolidated. As a result of this, it has recorded a negative goodwill of RM 28.45 mil on its profit and loss statement. Mainly due to the fair value of the identifiable net assets is more than the total considerations that VS has paid to acquired the 55.25% interest.

This one-off accounting treatment gave an impression that VS is very profitable. The true fact is VSIG business operation is not profitable at all. On consolidation, for the one month up to 31 July 2014, VSIG contributed revenue of RM44.71 million and net loss of RM5.88 million to the Group. (refer to note 22 of FY 14 annual report)

This probably explained why there is a disparity on the profit after tax of RM 40 mil and operating cash flow of RM 20 mil.

Another questionable treatment on costs, if you look at the inventories costs charged out to p/l, it is exactly the equal to the inventory costs recognized as cost of sale (refer to note 10). However, if you look at note 18 on operating profit disclosure, depreciation, wages, salaries and others amounted to RM 316 mil, these periodic costs are much higher than those shown in the p/l. I suspect some of these costs are residing in the inventories. The argument here is whether the inventory is overvalued most auditors will use the test case that the unit cost should not exceed the market price. I hope KPMG has done a good job here. An overvalue inventories can jack up the profit.

Posted by kcchongnz > 2015-05-28 12:05 | Report Abuse

Alphabeta,

Very detail analysis.

So that RM28.45m of "Effect of acquisition of a subsidiary" is how it comes about. Something like "releasing the negative goodwill", "expense" it in the income statement, oop, "profit" it in the income statement? Wow, that is very interesting accounting practice. But that RM28.45m "profit" is a huge amount equivalent to 70% of the net income.

Yeah you are right. The above none cash item is taken out from the cash flow from operating activities.

V.S consolidated financial statement seems complicated. But never mind, for retail investor like us, just follow the cash.

Is there any cash the business owner can extract out from the ordinary operations, last year, the last few years?

CFFO?
Capex?
FCF?

That is the important question.

KC

Posted by Alphabeta > 2015-05-29 08:49 | Report Abuse

KC, actually the description for this negative goodwill is "Gain in Fair Value for re-measurement".