P3billion debt no XMAS at Choppies

While Choppies is worth P500 million, auditors say CEO Ramachandran Ottapathu’s management style has left the company with a P3 billion debt, four times higher than the value of Choppies. The debt puts shareholders at the risk of losing every penny they invested and has wiped off prospects of ‘Christmas’ bonuses and dividends.

In the financial statements for the year ending 30 June 2018, it is alarming to note that the value of the shares issued by a Choppies, otherwise classified as ‘Equity,’ has considerably declined compared to the equity value reported during the 2017 reporting period. The equity value has also declined significantly when compared to the level of the company’s indebtedness.

Equity is generally referred to as shareholder equity, which actually represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debt paid off. Equity is found on a company’s balance sheet and is one of the most common financial metrics employed by analysts to assess the financial health of a company. Shareholder equity can also represent the book value of a company. Equity can sometimes be offered as payment-in-kind.

In the financial results for the reporting period ending 30 June 2018, the Choppies consolidated statement of financial position shows the equity value to be at P576.2 million, which is way below the P1 billion equity value seen in the 2017 corresponding period. This means that if Choppies was to be liquidated, shareholders would share amongst themselves only P576.2 million, half of what they would have gotten in 2017. It has shed about half a billion in value in 2018 alone.

At local asset management firm, Kgori Capital, Portfolio Manager, Kwabena Antwi, is irked by the fact that the Choppies debt-to-equity ratio is way too high and is at dangerous and unsustainable levels, if the 2018 financials are anything to go by. He cautions, however, that since the financials depict what happened in the 2018 fiscal period, the ratio could have been worse.

According to Investopedia, the debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by its shareholder equity. The ratio is used to evaluate a company’s financial leverage. The D/E ratio is an important metric used in corporate finance. It is a measure of the degree to which a company is financing its operations through debt versus wholly-owned funds. More specifically, it reflects the ability of shareholder equity to cover all outstanding debts in the event of a business downturn.

At 4:2 Choppies’ D/E ratio means that Choppies’ debt is actually four times larger than the company’s value, which means that if the company was to be sold, the proceeds would not be able to pay all the creditors while shareholders would pocket absolutely nothing.

Antwi further said a good or acceptable debt-to-equity ratio is around 1.5. However, he added that the ideal debt-to-equity ratio will differ depending on the industry because some industries use more debt financing than others. There are capital intensive industries like manufacturing and financial industries which often have higher ratios that can be greater than 2:5. At 4.2, Choppies’s debt-to-equity ratio is unhealthy, according to him. It means Choppies is borrowing at four times higher than the shareholder funds, which is unhealthy because inherently, debt is risky. It is believed that lenders and investors tend to favour businesses with lower debt to equity ratios. For lenders, a low ratio may be taken to mean a lower risk of loan default.

At brokerage firm Motswedi Securities, Garry Juma is worried by the high losses suffered by Choppies, which show that shareholders will not get dividends any time soon. Choppies made P445 million in losses for the 2018 reporting period. In the 2017 financials, Choppies had reported a profit, but the restated 2017 results showed a loss of P172 million.

While the results are as terrible as they are, PWC, which chose to ditch Choppies as soon as they completed the audit, issued a qualified opinion on the just released financials, which actually means that the financials should not be relied upon by any investor or lender. The auditor is essentially saying, “rely on them at your own peril”.

“The results of the legal and forensic investigations, detailed responses thereto from management and other evidence we obtained during the audit indicate interpretations and explanations of the same facts and circumstances, which conflict and differ from one another. The potential interaction of the multiple uncertainties outlined above and their possible cumulative effect on the financial statements have resulted in us being unable to form an opinion on the consolidated and separate financial statements as a whole,” PWC Individual Practising Member, Rudi Binedell, wrote in a statement..

Further, the PWC auditor said, as a result of the inconsistency of explanations received with respect to the nature of inventory included in the bulk sales transactions and with respect to the commercial substance of the bulk sales transactions themselves, contradictory evidence relating to the actual dates of contracting for the business acquisitions and the agreed purchase considerations, the delayed recognition of liabilities for the business acquisitions and the subsequent impairment of assets arising from these, we were unable to obtain sufficient and appropriate audit evidence over the occurrence and accuracy of these bulk sales transactions, and the valuation and accuracy of the business acquisition transactions and resultant impairment charges.”