A review of the quarterly earnings press releases of listed Indian companies gives the impression that most of them have managed to escape the global economic malaise unscathed. Yet, while on the one hand firms are reporting healthy revenue and operating profit margin numbers, on the other they are announcing asset sales, retrenchments and other cost cutting measures. This begs the question: do the quarterly press releases on performance provide sufficient data to contextualize such apparent paradoxes?
Unfortunately, most listed firms provide data on only quarterly earnings in their press releases and do not provide cash flow statements or balance sheets. The balance sheet and cash flow statement are, no doubt, presented in the annual report; but the partial data on earnings in quarterly press releases doesn’t always provide sufficient timely information to shareholders.
DLF Ltd had earnings before interest, tax, depreciation and amortization (Ebitda) of Rs9,960 crore (68% of revenue) and Rs5,985 crore (57% of revenue) in fiscal years 2008 and 2009, respectively. However, the company required Rs2,597 crore and Rs566 crore of cash in those years for running its operations. High Ebitda margins don’t seem to be translating into cash generation for this company. Interestingly, DLF paid dividends worth Rs798 crore and Rs401 crore, respectively, in those two years. Since DLF made operating cash losses, it’s fair to say that the cash for these dividend payments came from borrowings and the initial public offer. Clearly, we can draw a better inference about the financial performance of this company if we had a cash flow statement.
Consider Tata Consultancy Services Ltd. TCS had a drop in Ebitda margins of almost 3 percentage points, from around 27.6% in fiscal 2008 to 24.6% in fiscal 2009. However, cash from operating activities as a percentage of revenue increased by 3 percentage points, from 16.7% to 19.7% in the same period. Two factors appear to have contributed the most to this improvement in cash flow from operations. One is improved collections, as evidenced by reduction in the daily sales outstanding; the other is improvement in billing cycles and documentation associated with billing, as evidenced by a reduction in unbilled revenues as a percentage of revenues. Again, we can see the earnings statement alone is insufficient.
A “going concern”—an entity not expected to suddenly liquidate— needs to generate cash for its investors consistently. Earnings depend on accounting policies followed by individual companies on items such as revenue recognition, expense provisioning and cross-currency transaction accounting, among others. Quarterly earnings statements of most companies are necessary but not sufficient for an investor to understand how his company is performing. Earnings data without information on the cash flow is inadequate at best, and misleading at worst. In the current age of instant analysis in the media, earnings press releases have an enormous and immediate amplifying impact in either direction on the price of a company’s stock, which can be made worse by partial data.
The additional effort to provide required data to investors should be minimal, since enterprises already invest heavily in technology. The boards of directors of most listed firms (at least post-Satyam) would be reviewing the balance sheet, cash flow and earnings reports of their firms every quarter.
The Securities and Exchange Board of India would also do a great service to investors by amending clause 41 of the listing agreement, which requires adequate financial information disseminated to investors in a timely manner, to ensure that listed firms publish the balance sheet, earnings and cash flow (and not just an unaudited earnings release)—albeit unaudited—every quarter. The shareholder’s mantra, to paraphrase Jerry Maguire, should be “show me the money”.
Puranika Narayana Bhatta runs a finance and operations consulting firm in Bangalore. Comment at email@example.com