If you buy 100,000 shares of a stock at a price of Rp100 per share, worth a
total of Rp10 million, and the next day your shares rose 2% to Rp102 per share,
then what is your gain? Of course 2% multiplied by 10 million, yes? And the
result is Rp200,000. The next question, would you surely get the cash of Rp200,000? No. The
figure can still change at any time, along with the changes in the stock price.
If tomorrow your stock climb higher to 104, for example, then your profit would
be Rp400,000. Conversely, if your stock dropped to 99, then your profits will
instantly disappear and turned into a loss of Rp100,000.
So, as long as you do not sell your shares, then your gain or loss is not
yet fixed or real. If you sell your stock at a price of Rp102 per share, then
your profit of Rp200,000 becomes real. So if there are people who sell their shares
at a higher price than the purchase price, it is also known as realizing the gains. Similarly, if
there are people who sell their shares at a price lower than the purchase price,
it is referred to as the realization of
losses. You have not actually receive the gain or loss, as long as your
money is not yet in the form of cash.
Okay, but you are clearly know about that. So what exactly we are going to
discuss in this article?
When you read a company’s financial statements, especially in the income statement,
ever finding accounts like these? 'Unrealized gains', ‘currency loss’, or the
like? Those aren’t real accounts, because there were no money that coming in or
out. The accounts are usually placed under the account of operating profit.
Although not real, these accounts often made a company's net profit soars, or
otherwise, dropped into negative (loss). Here's an example, click image to
enlarge.
The above is a page of financial statement of Citra Marga Nusaphala Persada
(CMNP) for the period of first half of 2010. Take a look at the marked section:
There is mentioned that CMNP received income outside of the company's
operations, amounting to Rp236 billion, which is derived from unrealized gains
from the decrease/increase in fair value of its bank loans and bonds. Thanks to
this income, CMNP net income became more Rp400 billion, or soared 1,190.5% over
the first half of 2009, which was only Rp31 billion. Wow!
But you have to realize that the figure of Rp236 billion is not real,
because it could change at any time, along with the change of the fair value of
CMNP bank loans and bonds. If the fair value is down, for example, then the
profits will go down, or even being negative to reduce company’s net income.
Conversely, if the fair value increases, the unrealized gains will also rise. The
figure of Rp236 billion is derived from the fair value as at June 30, 2010, or
at the date of the financial report. Today, that number might been changed.
Then when CMNP will take profit from its bank loans and bonds? When the
company had paid off the debts, or sell it to another party. Just like you will
receive fixed gain from your stock when you’ve sold it at a higher price than
the purchase price.
So eventhough CMNP had revenue of Rp236 billion in its financial statements,
but in fact the company did not received any money.
Because the figure is not real, aka not (yet) exist, then CMNP net profit
of Rp400 billion is also not real. And that means? Company’s net profit
increase of 1,190.5% was also not real! So you have to be careful every time you
read a company’s financial statement, where you must check the accounts, one by
one.
Another example is Mitra Adiperkasa (MAPI), which in 2008 had a Rp331
billion loss due to losses in foreign exchange. Because of this loss, MAPI net profit
for the period became negative aka loss amounting to Rp70 billion, while its
operating profit reached Rp303 billion.
Although there was no word ‘unrealized’ or such like the example of CMNP
earlier, but the losses aren’t real, because it is not derived from increased
costs, impairment of assets, or the like, but from changes in the exchange rate
of Rupiah against Baht (Thailand). You see, one of MAPI subsidiaries namely TS
Lifestyle Ltd., which is the owner of a fashion store in Thailand, presents its
value of assets in the currency of Thailand, which is Baht. Most likely during
the period of January - December 2008, the value of Baht against Rupiah dropped
drastically, which may be due to the global crisis that occurred at the time,
so that when the assets of TS Lifestyle are expressed in Rupiah (because MAPI’
financial statements are expressed in Rupiah), the value became dropped.
Here’s the illustration. Say the value of assets of TS Lifestyle in 2007
was 10 million Baht. Because at the time,
the exchange rate of Rupiah against Baht was (for example, for illustrative
purposes only) Rp350 per Baht, then the value of assets assets was equal to 350
x 10 million = Rp3.5 billion. In 2008, TS Lifestyle’ assets actually rose to 15
million Baht. But since the value of Baht against Rupiah dropped to Rp150 per
Baht, then the value became 150 x 15 million = Rp2.25 billion, down by Rp1.25
billion compared to the period of 2007. In MAPI’ financial statements, the
reduction was accounted as losses.
Then why you said that the loss is not real? Because it’s clear that the
company did not lose any money. Once again, the numbers are only in the books
alone.
If you notice, most accounts of income on financial statement that placed after
operating profit, except taxes and interest on loans that have been paid, are
not real. But some of these accounts are real. Some of accounts like dividend
from an associated company, it was a real income, because the company are
actually received money.
If you're not sure about these ‘unreal’ things, then you better avoid the
stocks with that kind of financial statements. But typically, investors are
less concerned about this. If a company scored a significant increase in net
income, although the increase is unreal, the shares are still hunted. When this
article was written, CMNP is in 1,330, aka rose more than 60% in the last year.
The question is, what will happen if in later financial statements, the ‘fake’
gain is dissapeared?
Original article was written at December 28, 2010
1 comment:
well, it reminds me of BKSL's 2013 income statement. There are accounts of 'Gain on previously held interest of investment in associate' and 'Negative goodwill". These ones confused me a while,but then i realized something fishy about it. hehehe you know it, don't u? Two of the managers has resigned early this year. Made me wonder.... anyway, thx a lot mr th for the post. qqlibboen.
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