YouSaid · the spoken record

Stephen Clapham

lines on the record: 65
first: 2021-11-02
most recent: 2021-11-02
sittings or episodes: 1
sources: podcast

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“I should look forward to seeing you there. Thank you very much for having me. If you want to give your viewers, listeners want to find me the website's behindthbalance sheet.com. I'm on Twitter at Steve Clapham and the podcast is called Behind the Balance Sheet.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“The answer to the first question is stock-based compensation, and I've written a blog on it behind balance sheet.com. Actually, a number of professional institutional investors have emailed me to say that they found it helpful. I know on the second question, no.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“A few finds here and there, they might be prepared to sacrifice U.S. pensioners with their savings in these stocks. All of those things, you know, I can imagine wouldn't be a particular problem for the Chinese authorities. But will Alibaba and Ten Cent continue to be core elements of the Chinese society? Well, I have no doubt that that's the case. They might not be able to make quite as big a rent out of it, but they're far more entrenched in people's day-to-day lives than Amazon is, for example.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Volatility because I think there's more things for people to digest. But in the end, I don't believe that Chinese government will seriously impair the ability of Alibaba and its peers to make money. It might do for a DD, it's kind of like a side issue. Alibaba and Ten Cent in particular are very significant pillars of the Chinese internet establishment. And without them, quite a lot of day-to-day processing in China would be much more difficult. And they're employing lots of people common sense says that they might want to wrap Jack Ma on the knuckles. They might want to...”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“I would back Charlie Monger's reading of the annual report over mine. I mean, no question. But there are some major question marks about the accounting of all those five companies. One in particular where I feel that the market has completely missed the shenanigans that they've been engaged in. Alibaba has been hit quite badly. 10 cent not quite so much. Part of the hit is the fines. And we'll see what happens over the next six months. I mean, the point I was just trying to make was that there were a lot of people on Twitter saying Charlie Munger's bought it, so it's all okay. The stock went up and then it came back down again. And I don't think we're at the end of that.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“But if it were anybody other than Charlie Munger, you would ask yourself, well, what does he know about Alibaba? I have no idea. The guy is no question one of the cleverest people in investing world.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Donations has already been extracted and that seems to me quite a good compromise from Chinese government's perspective. And I imagine that things will settle down. But I wouldn't be surprised if there is quite a lot of volatility between, you know, over the next six months, because that whole audit issue needs to be resolved. I'm not aware of the state of play today. I'm not that, I don't follow it. You need to be close to the US regulators and close to the Chinese regulators. And neither, but that would be what I would be looking at. But interesting, you know, Charlie Munger has bought Alibaba and a lot of people seem to be happy to outsource their investment decisions to a 97-year-old genius who I couldn't and wouldn't say anything against Charlie.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“That the Chinese authorities don't really care that much about the US investor. It's not top of the priority list even makes it onto the first page of the priority list. So I think you've got to be slightly worried. And obviously there's a whole issue about...”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“highly warranted investments that they've been making that have been another, I don't know how many percent of the Chinese growth story. So China is slowing down. I mean, I think that's a very simple conclusion. And obviously the knock-on from that is that the inherent growth available to the Alibabas of this world will be lower than it was in the past. You know, they'll be less able to grow at their historic rate, partly because also there are now much, much bigger companies, but simply because the Chinese growth will be slower. As regards the actions of the Chinese government, the actions in regards to education companies, I kind of understand, and I'm slightly surprised that they're prepared to throw these companies out of the window. But it shows”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“And the reason that's so important is that the construction of residential apartments, often purely for speculation, is a foundation of the Chinese economic growth story. It's probably 20, 25% of GDP. So the developers find it more difficult to get cash. They'll find it more difficult to get cash from the banks and other financing areas. They'll find it more difficult to get cash from people putting down money for apartments. So they'll have less money. So they'll buy less land. The local Chinese municipalities rely on land sales for 40% of their income. Well, if they're selling less land, they'll have less income. So they in turn will be less able to finance bridges to nowhere and subways, additional subway line that they don't need and all the other daft.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“propensity to put down money for an apartment that's going to be delivered two years down the road will diminish and Leslie just come out and say everybody ever grand you're underwritten by the Chinese government you don't need to worry you can all buy a flat you all put you out in your deposits tomorrow without any concern unless they do that they'll do people's willingness to go and buy an apartment you know they buy the apartment they just leave it empty and wait for the price to precede well the the guaranteed price appreciation is probably not as secure and your ability to get your money back in the form of a finished department is a lot less secure because yeah the people who put their money down for never grand department they'll probably get it then but they might have to wait quite a bit longer than they hoped because you know this whole thing would take you know time to unwind”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Well, funny, I started off writing a blog in Evergrand back in August, and Eileen, you know, it got so long and so complicated that I ended up sitting in my work in progress folder, Evergrand. People have kind of missed the point in Evergrand. The point in Evergrand is that it's a massive blow to the Chinese growth story. I mean, I don't believe that the Chinese government will Evergrand goes to wall because there's too many people who have put down too much money on deposits on apartments that have yet to be delivered. What will happen is that the cost of capital for the house builders, to the developers in China, will go up and their ability to access money will go down.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Is you've had COVID and therefore a lot of weaker players go to the wall and that leaves room for the stronger players, the Ryanairs to prosper. But for every Norwegian heir or similar that goes bust, there's going to be somebody else stepping in because the planes aren't going away. It's not like a conventional industry where you've got a factory and the factory gets closed down and converted into some other purpose. The plane has got a single purpose and planes don't evaporate. So planes will come back. And so we're not going to have a huge difference in the long run supply demand relationship. And if anything, it's probably a bit off the demand. But the supply doesn't disappear. That's kind of the problem for the airline industry.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Now, that meeting had been on Zoom, I guarantee you it would have been half an hour. But, you know, again, the ability to go and interact with your colleagues and competitors and customers and suppliers by going to a trade fair or a conference. I mean, it's very hard to replicate that on Zoom. It's not going to be tomorrow that we're back to pre-COVID levels, but I'm fairly optimistic that there will be a hint up demand for leisure and B pent-up demand for business sales that will help us over that hump. I don't think there's any sort of bargain, obvious bargains in the stock market because of that. And the interesting thing about the airline industry is that, you know, what you would tend to look at here”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Well, I mean, the valuations aren't as cheap as I would have thought they would get to. I think unquestionably there's an impact in business travel. There must be. I think you'll be surprised at the extent, the degree of recovery in business travel, because once people start...”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“In the last 18 months, you know, this is just another symptom of stupid market, crazy markets. GameStop Carnival was another less extreme, but similar sort of daft valuation being applied to an inherently much more risky company. So, you know, you can say, well, money's cheaper and therefore a rising tide lifts all boats. If I can use that ton. I thought that was damp. Now the shares to come off quite significantly since, but I'm, you know, I'm still not like, why should it be valued like this? I'm still asking myself.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“So, you know, that isn't very good for sales. I don't know what the probability of that is. I don't know what it's impossible to quantify the risk, but you know that there's a risk, right? It might only be a quarter of a percent, but there's some risk there. The fact that stock's much more indebted, the cost of fuel has gone up tremendously. And labor.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Six months ago, I was looking at the cruise stocks and I said, why is carnival volued more highly than it was pre COVID? The share price was, it had gone down, it halved. But it issued a lot more stock and it issued a ton of debt. And the enterprise volume was like a billion higher than it was pre-COVID, something like that. So 35 billion, forgotten exactly what the numbers were. First of all, you've got a company that's hugely more leveraged. So it's hugely risier. Second of all, we don't know what the propensity to cruise will be. Yeah, there's some pent-up demand. People want to go and ship. But say we've got another variant, another virus variant that people might not want to go cruising again. Because remember those pictures of that ship, was that carnival ship or Piano ship?”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“If the margin expansion continues at the same rate, but then I would have said if you ask me this six months ago or nine months ago, I've said the same answer, so you shouldn't necessarily believe me. But, you know, we're in an economic recovery. Many people have got cash in their pockets because they haven't been at spending. Many people have got cash in their pockets because they made more money from the government than they would going to work. And again, they haven't been able to spend it. So, you know, when we come up, and of course this tremendous built-up propensity to spend to go on holiday, to go out for a drink, to go meet friends, to go and do an activity. So, you know, that could last another 12 months. But I think what I found very surprising”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“And they're just inclined to worry about the delivery. But certainly the issue of shortages means that companies have got a lot more pricing power. Now, will that carry on? I don't know that it will. I mean, my experience of inflation as regards stock markets is very limited because you need to be even older than I am and I'm very old. Common sense tells you that inflation tends to make life more difficult for most companies. There are some companies that have got really strong pricing power where they're able to pass on cost increases and it's not so much of an issue. But for many companies it becomes an issue and you end up getting margins squeezed because you get the cost increases before you can pass it on. And I'd be surprised.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“A good question. I'm not sure I have a very good answer to it. I mean, I think I have to confess, I'm slightly surprised at the strength of earnings. And it's not what I would have assumed would happen because we're in an inflationary environment. And what generally happens in an inflationary environment is it's quite difficult to pass on the cost increases. So you get all these increases in your cost and it's difficult to pass them off. And I think maybe we're in a sort of interregnum where companies, you know, if you're an automotive company, there's huge demand for your products and therefore you can get price through. I think when, because we've got all these supply chain issues and all these shortages, people were less inclined to worry about the”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Seen a massive reduction in the production capacity of these businesses, some factories. But for every factory they've taken out, there's been a new startup. And these new startups are going to be building cars. You know, common sense tells you that there's a hell of a lot more capital employed in the automotive industry today than there was five years ago. There was too much capacity five years ago. We've got a lot more capital in the industry. We've got hope that electric vehicles will be more profitable than normal vehicles might be in 10 years' time. Possible. A lot less moving parts. The batteries have become quite expensive and we've yet to see a significant evolution in the design.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Saying, Oh man, if we were an EV, we would get, you know, pole star. What was poll star valuations think was $30 billion? Lucid $30 billion and $40 billion. I mean, you know, the very success of Tesla is encouraging a whole load of venture capitalists to throw huge amounts of money into this area. I mean, most of these companies may not survive, but the one thing we're not doing is reducing global automotive capacity. And we had an excess of automotive capacity before Tesla arrived in the scene, before we started driving electric cars. And as far as I can see, the only thing that's happened is that we've got even more capacity. Yeah, we've had getting together with Peugeot. We've had Peugeot buying opal.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Sorry, forgive me. I wasn't recommending Forder General Motors as a better bet than Tesla. I was simply pointing out that if we'd foolish to assume that because Tesla's valued a trillion dollars, it's automatically going to end up with 30% of the global automotive market. I would think that it would be highly unlikely it would end up with anything like that. It might be the most efficient and most advanced electric vehicle producer today, and there's no question that they've done a brilliant job. Have they done a trillion dollars worth of brilliant job? I don't think so. Automotive manufacturer will remain a capital intensive, low margin business because there is too much capacity in the world. And guess what? Every vehicle manufacturer looking at Tesla.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“It's cost of capital was incredibly low. It gives it a massive advantage in the capital intensive industry, no question. And sure, you know, Ford and GM have got huge pension funds, huge deficits, and the medical post-retirement medical care commitments, liabilities on top of it. So they've got very, very significant liabilities. What do you think the US government's going to think about a forwarder general motors being in financial difficulty and all these pensioners being at risk because the pension is not fully funded? I think the US governments can be quite nervous about that, isn't it?”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“That the incumbents won't respond and that the new disruptive arrivals will win up because guess what? Many of these companies, foreign module companies been around for over 100 years to assume that it won't be able to compete I think is unrealistic.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Is that the global automotive industry last time I looked was twenty, sixteen, twenty seventeen. It's quite a lot of work to do the maths, but last time I looked, there are R&D, annual R&D spend was $80 billion. I can guarantee you that none of those electric vehicle manufacturers, including Tesla, have spent a fraction of that. Yes, I mean, you know, Elon Musk is a genius. But, you know, it's a lot easier to copy somebody else. And, you know, all these companies have got very, very significant R&D firepower. So it just daft to think that Daimler and Mercedes, Volkswagen, BMW, Audi, Porsche, these German manufacturers won't produce brilliant electric vehicles. So I just think it's ludicrous to assume”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“I don't know what the OEV sector is valued at. I mean, when you add in the Neos and the Lucids and the Nicolae, I mean, you know, they're all worth, you know, 20, 30, $40 billion. Some of them will be successful. I mean, I happen to think that lucid looks are very attractive car. I mean, I've not seen one in the flesh. I've talked to one of the people that was involved with it early on when they were raising private capital and I looked at it. And they've got a lot of the former Tesla engineers. So, you know, it's probably going to be product-wise, a good competitor to the Model S but it's one thing having a good product. You've got to make it and you've got to sell it. And that's, you know, those are huge challenges. And there's a simple fact of the matter.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“And he said, oh no, they're developing electric technology and they'll be at the forefront of that and they've got all the Formula One knowledge from using the electric motors in F1. Tesla's valued a trillion dollars. Obviously, people believe that electric technology is AV technology are worth a lot and that it will be difficult to replicate. Well, you know, I'm not saying the Tesla is worth a trillion dollars. I don't think that's right. But I don't think it's going to be quite as easy for...”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“is a complete completely different game. So Ferrari's ability to distance itself in terms purely of the product is diminishing. And at the same time, has to spend a huge amount of money developing its electric capabilities. It has a tremendous cachet from Formula One. Well, do you think Formula One is going to be here in 10 years? Will you be allowed to drive cars that are consuming fuel at the rates of, I don't know, Formula One cars fuel consumption is, but it's certainly under five miles per gallon. Is that going to be the poster child for Generation Z? I don't think so. So, you know, maybe they'll be able to sell clothes with a Ferrari label. Good luck. I mean, not at this market now. So I just made a simple.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“opening the garage, taking the cover off it, and looking at this beautiful car. Putting the key in the ignition, turning the key, starting up and hearing the engine noise. You know, electric cars have got a very different configuration, and so many, many electric cars can look very, very different from conventional internal combustion cars. The styling, the attraction is going to be slightly different. And I believe that noise, you know, electric cars is silent. You just will not get the same pleasure from driving an electric Ferrari. Even if it's as good. And I can tell you that a Tesla Mod OS handles every bit as well as most Ferraris. Maybe not the fastest, highest performance one having battery.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Fewers or listeners want to read this, they can find the blog on behind the balance sheet.com on the website. The point I made was a very simple one. First of all, you're paying a very high valuation for Ferrari. It's a very good company. I mean, I was very enthusiastic about it when it came to stock market. But you're paying the same multiple or a higher multiple than you are for Louis Vuitton. Now, I don't have any detailed understanding or knowledge of Louis Vuitton. I just made the comparison. I said, look, in 2030, it will no longer be possible for Ferrari to sell petro engine sports car in this country. Ten years from that, their products will have to be largely electric. And what is the pleasure in owning a Ferrari? Pleasure in owning a Ferrari is...”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Reasonably well because they're bringing out an SUV and there's all these rich fat old businessmen who can't get into Neston Martin and they'll just buy the SUB instead. And Ferrari will be the same because lots of big fat men who can't fit in a Ferrari or quite difficult to get in and out of. And so an SUB will look better and easier to drive every day. Personally, I think it's a travesty that Ferrari Luca de Montezumo, who was the old chairman, said that Ferrari would never build an SUV because he would feel that he was a crater to the brand. And I think they are being a traitor to their own brand and their own heritage. And I think it will do them quite a significant amount of damage, but it will help the bottom line to kick off with.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Bringing out an SUV next year, I've forgotten the name of it. It's quite difficult to pronounce Italian name. But they've got pictures of it on their website, a red SUV. And if you're in China, then you like to be driven rather than drive yourself a very Asian thing to be driven rather than driving yourself. So you could understand why Ferrari SUV would be incredibly popular in the same way as Natson Martin SUV was incredibly popular interviewed on the BBC Radio 4 Today program with 7 million listeners about the impending Aston Martin IPO. They said, well, you know, how do you think it'll go? And I'd spend 10 minutes talking about how that counts were crooked and how the company wasn't raising any money and that was stupid IPO. And I thought, well, you know, I think the company would probably do.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“But all that information is quite sensitive and quite voluble and so I tend not to publish too much about it. So the stuff that I do in the blogs is more of fun stuff. So like Ferrari, I just looked at Ferrari because I met this guy, really smart guy, another Londoner, Michael, who had just taken over running £250 million fund and he put 7% of the fund into Ferrari. And I said, that seems very daft to me at this price. And he goes, oh, no, no. And he sent me his thing about the letter they'd written to his clients saying what a great company Ferrari was. And, you know, there was one thing that I really agreed with. Ferrari are...”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“A little bit of analytical skill should be able to do quite well and pick up things that the South side haven't. But I mean, you know, I do three things. I've got an online training school for private investors. I do institutional training for big institutions. I help their analysts improve their skills. And I do bespoke research. And the bespoke research I do for a small group of institutional clients, I tend not to publish that. You know, if you pay me to go and look at a stock for you, I don't tend to make that available. I mean, occasionally we did last year with the forensic accounting report on the big five Chinese internet stocks, the client allowed me to publish that and we sold it for $5,000 a report.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“accounting so they've you know they've graduated from university done an increase in degree Well, I can absolutely guarantee you that the one thing you won't learn in a firm of accountants is how to analyze a company. So the sell-side role has been really juniorized and therefore anybody with, you know,”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“You know, my view is that the role side analyst has been significantly juniorized over the last 10 years. We've seen that particularly in Europe with the advent of MIFID 2, which was a regulatory change, which effectively resulted in many, if not most fund managers paying for research provided by the banks out of their own P&L and rather than the fund paying it, they're paying it out of their own pockets, they're going to pay a lot less for it. And as a consequence of that, the overall pool of research commissions has fallen very significantly in Europe. And as a consequence of that, these are profit-making businesses the banks have decided that they needed less senior endless. And they juniorized all the roles. And so the poorest outside guys, they are a lot of merge of...”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Steve, I know you've got other companies on your radar, whether it's Netflix, Vodafone, Doc Martins, Ferrari. What are some other companies that you really have dug into the balance sheet and you've done the work that you have?”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“That's the thing. I mean, it would be showing his operating profit, but there would be no cash. You should not pay me anything. But you're going to pay me, you're going to buy me a drink, right?”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Extra sales, I've got $100,000 of extra profit because I don't have any costs associated with those sales. And I've got $100,000 sitting in my balance sheet as a receivable.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“I mean, there's all sorts of techniques companies can use to fabricate sales and profits. And if they're not supported by cash, then you need to be worried. I mean, there's many, many ways that companies can do that. If you are a customer of mine and I wanted to improve behind the balance sheets results for the year, this is a good time for me to do it because my year-end is the 30th of October, 31st of October. All I would do is today, the 1st of November, I would produce an invoice Jack Farley $100,000, put it in my accounts, tell my accountant, oh yeah, Jack's going to pay me next month. I'd forgotten to bill him, so I put in the invoice. I drew it up in 1st of November, but I'm putting the date, it's 31st of October. I know that's a Sunday, but don't worry about it. And hey, I've got $100,000 of...”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Let's go back to the second sort of act, the red flag you see, which is the income looks good, but the cash flow is not so much. Why is it a lot easier to fake a net income than it is to fake a cash flow? And then when you say a cash flow, are you looking at the operating cash flow? And then if the operating cash flow isn't there, how do companies make it into the net income look good? What are they doing on the financing cash flow and the investing cash flow in order to make up for that lack of money coming through the door?”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“balance sheet which was cashed they had received from customers which was a week's sales would be a lot more than that now I imagine and of course again they're paying their suppliers down the road but if you've got a manufacturing business you'll tend to have receivables so your customers won't pay you for 30 60 days you tend to have inventory so you might have 30 days of inventory or 60 days of inventory and you might not pay your suppliers for 30 days or 45 days but you end up with you know 15 30 50 70 days of inventory I mean you know I've seen company of networking capital I've seen companies with 100 days of networking capital and that is money that you need to make a return on you know it's the same as it's not the same as fixed assets but you've got your fixed assets and your working capital represent the capital of the business”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“For most businesses, if you're Tesla making cars, for example, I don't know how long it takes Tesla to build a car, but I imagine it's quite some time. And you need a whole lot of buffer stop. So you might receive the inventory, the raw material inventory, and before it ends up as a car and going out of the factory, it might be, I don't know, 15, 20 days. So you've got 20 days of inventory raw materials, but you've got a whole load of buffer inventory because you need to have more stock than the one for the one car. You've got, in the case of Tesla, very cleverly, you have to pay for the car a week before you receive it. So they've got, I mean, last time I looked, they had a billion dollars on”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“It has the cost of the lease up front. It's got the cost of fitting at the store. But then when you look at the working capital that's involved, they just need to fill the shelves. They fill the shelves in day one. They won't pay their supplier, whoever gave them the product for a minimum of 30 days and usually 60 days. But the day that they open the store, which is usually the day after they stop the shelves, the day they open the store, people come in and pay them cash. So they've got a negative collection cycle which will be minus 40 days. So if as they grow, their cash goes up because the money they've received from their customers ends up in cash and they don't yet pay their suppliers for another 30, 60 days. So that's the idea of working cash.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“So they've got a very fast supermarkets, they turn over their shelves very quickly. And the payables, they tend to take quite a lot of credit from their suppliers. So if you think about a supermarket, it opens a new store.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“So look, working capital is simply, the way I think of it, I talk about the collection cycle. And the collection cycle is you take the trade receivables as a day's sales, the inventory as day sales, less the trade payables as day sales. So it's really the amount that your customers owe you, the amount of money you've got tied up in stock, less the amount you can draw on your suppliers by not paying your suppliers immediately. Working capital for most companies is positive for a few industries it's negative. So for example, if you look at a supermarket, it doesn't have much in the way of trade receivables because the only receivables are the money that it's waiting for the credit card company to pay. So those tend to be very small. It's inventories are actually not that large relative to sales, but inventory turns over.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“Relative to sales or relative to cost of goods sold, that's usually a problem because what it usually indicates is either bringing sales forward, fabricating sales, or simply the customers don't want your product and you've got too much stock. So whichever way you look at it, it's a sign of trouble. So those are the three indicators beyond the adjusted earnings number that I tend to focus on.”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT
“So, if you look at those metrics and you think, well, the company's not generating any cash, that's not a good signal. And it's not going to, you know, a company might look great and might have a fantastic share price, but it's not going to make you any money in the long run. It needs to generate cash. And the third measure that I look at is working capital ratios. And in particular, the ratio of trade receivables to sales and the ratio of inventory to sales. And if you have rising receivables to sales, it generally means that you're doing something to bring your sales forward. And it's a classic indicator of a company that's cheating engaged in earnings management or engaged in fraud. But even if it's not engaged in some for earnings management fraud, if your customers aren't paying you, there's usually a problem. If you've got rising trader seaboos, that's usually a bad signal. And similarly, if you've got rising inventory,”
2021-11-02 · Forward Guidance · Hunting for Hidden Financial Risks | Stephen Clapham · IDENTIFIED FROM THE TRANSCRIPT