Tag Archives: Finance

Zombie companies can be harmful

August 28, 2017 By in Economy, Finance Tags: ,

The term “zombie company” has recently entered people’s lexicon as the phenomenon manifests itself in China. Yet this issue did not start with China, it is closely linked to the problems faced by Japan that started in the early 90’s, called Japan’s Lost Decade and sometimes the lost two decades, which arrested the development of their economy for at least a decade, even though the nation is known to be hard working and efficient. After all, Japan is the home of global super-companies such as Toyota and Sony so understanding how the economy stagnated could yield important lessons.

There are many closely related definitions for zombie companies but I will use one defined in the academic paper Zombie Lending and Depressed Restructuring in Japan published in the American Economic Review 2008. The definition that they give is:

A company with poor productivity and profitability that should have withdrawn from the market but continues to do business only thanks to support from creditors or the government.

Sound familiar? Continue reading →

Unmasking business shenanigans

May 23, 2017 By in Finance Tags: , ,

I have recently pointed out that one of the warning signs that a business is facing issues is when core revenue, ie revenue from the main business lines, is down but profit is up.

Why the combination? Why not simply flag a drop in core revenue? Because it is normal for revenue to fluctuate – especially in a challenging economy. But if revenues go down and profit goes up, it means the business has miraculously had a major increase in non-core revenue or, worse, has made large cuts to expenses.
Large jumps in non-core revenue are rarely sustainable. They usually come from either re-valuing assets, an exercise that does not affect cash flow nor is it recurring, or from the sale of an asset at a price higher than it was held on the books, which helps cash flow but is non-recurring and may reduce income-generating assets.

On the expense side you have actual cash expenses that are reduced, usually employee compensation or number of employees, but this can also include things such as rent. These have a positive cash-flow effect but are limited in the number of times they can be done, not to mention that it can affect revenue generation by losing employees or reducing morale.
The red flag is when non-cash expenses change drastically, such as depreciation, amortisation and impairment charges. This is a red flag because it is relatively easy to massage these numbers, plus it has no impact on cash flow. Continue reading →

Venture Capital Lessons from India, Lebanon and Ireland

January 31, 2017 By in Investments, Finance, Government Tags: , , , 1 Comment

In a recent article I pointed out the failure points in the UAE’s venture capital ecosystem, in particular the lack of support for entrepreneurs and start-ups. In this article I’d like to review some of the initiatives other countries have launched that could be useful in upgrading our ecosystem.

Given the recent visit to India of Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces, let us start with that government’s efforts, and in particular the Startup India initiative. This initiative is comprehensive, starting with a streamlined registration process. Importantly, it has a streamlined bankruptcy process that seems to be fair – no extra-judicial imprisonment if an entrepreneur cannot financially meet a liability. There are also tax breaks for the company as well as investors in the company.

Continue reading →

A review of my financial analysis

November 29, 2016 By in Economy, Finance Tags: ,

One of the problems with news articles is that it is easy to write something and then not be held responsible for it as the story develops. I will try to change that with this article.

I wrote an article recently on how the consequences of Brexit were overblown and how the idea of an EU 2.0 might make sense. The idea of EU 2.0 evolving the current framework against Germany’s wishes to match today’s economic realities could be triggered by Italy.

Recent reports show that France is also jumping into the fray but on Italy’s side, basically over the issue of bank regulation. With Britain on the way out and Italy and now France unhappy with Germany’s overly conservative stance, we may see the more constructive evolution of the EU to version 2.0 rather than the complete meltdown that the current path is heading for, a national equivalent of Lord of the Flies.

Continue reading →