By Rawle Lucas
Last week, we looked at the structure of Massy, the business activities in which it was involved and the geographic spread of its markets. This week an effort is made to place its financial performance in the context of the broad and diverse operations of the company. Like all other companies, management of Massy assumes certain rights and responsibilities. It has the right to determine how the resources under its control are used. However, the control exercised over those resources imposes an obligation on the management of Massy to handle them properly and in the best interest of the owners. They must also handle properly the resources entrusted to them by creditors and reach out to customers in a responsible manner if they want those resources to work well. The shareholders of the company have expectations too that management would produce the goods and services to the quality that meet the promises that it would have made to customers.
Further, the shareholders of Massy have reposed confidence in the management also to fulfil the goals that it set and to provide them with a reasonable return on their investment. Much of what we look for in the performance of the company could be found in the relationship between the assets and liabilities of the balance sheet and in the income statement of the company. Components of those two important financial statements also enable us to see the business strategies employed by the company to achieve its objectives. Together these elements provide an insight into how management has utilized the resources under its command to serve customers, to meet the obligations to creditors, to grow the company and to satisfy the expectations of its owners.
The best way to examine the performance of a company is to see how it is doing with its customers. Customers represent the most vital source of financing for any business. Serving them well is central to the success and survival of any business. It is through a valued relationship with customers that the management of any organization can generate income for use in the business while accruing resources for the benefit of its owners or investors. A variable that offers a basis for forming a judgment of management’s relationship with its customers is the asset turnover ratio. It determines how efficiently the management has been using the resources that have been assigned to them to bring in revenues from its customers. This variable, when applied with others, is also crucial in determining the rate at which owners receive satisfactory returns on their investment. The asset turnover also helps to reveal the business strategy of an enterprise.
In the case of Massy, the asset turnover has been highly variable as could be seen from the table below. In 2006 Massy was generating TT$1.36 for every TT$1 of assets used. By 2014, that rate of income generation had declined to TT$1.14 for every dollar of assets used. This trend in the ratio represented a 16 per cent decline from the base period of 2006 and works out as a two-per cent annual decline over the period in reference. The management of the company generated 22 cents in fewer sales for every dollar of asset used in 2014 than it did in 2006. As a consequence, Massy found itself having to tie up in the business TT$1.5 billion more resources than it might have liked in order to generate the level of sales that it did in 2014. To a certain extent Massy could be pleased with where things are at the moment, because from 2008 to 2011, the company had to keep in excess of TT$2 billion more in assets in order to meet the demands of customers. The ways things are now, it has to keep far less money tied to customer financing than during the intervening years of 2008 to 2011.
The challenges of Massy have obviously increased when considering the situation of its receivables. Ten years ago, Massy collected money from its customers eight times per year or every 44 days. Now Massy collects money from its customers about six times per year or every 64 days. A clear business strategy of Massy is to extend credit to its customers for longer periods of time. This is a strategy over which Massy appeared to have lost control at one time. Massy had money uncollected for an average of 66 days or 22 days longer than the norm. Things were so tough that Massy at one time had to wait as long as 72 days to collect its money from customers. A review of its annual reports reveal that the global financial crisis which started in 2008 and continued into 2011 contributed significantly to this outcome. The increase in the collection period is a big reason for the inefficiency seen in the use of Massy’s assets.
Measured in dollars, the decline in efficiency in the management of its receivables cost Massy an estimated TT$594 million in 2014. From the comments appearing in its annual reports, the company is obviously aware of the problem and has been progressively reducing the time lag between sale and revenue collection.
Despite the collection problem, the pattern of the utilization of its assets suggests that Massy relies largely on a balanced approached to generating its income. Massy increased its assets by 15 per cent per annum over the 10-year period from 2005 to 2014. The current assets grew by 16 per cent while the productive assets of property, plant and equipment increased by 15 per cent as did other assets employed in the business.
The composition of the assets also reflects the long-term investment strategy of Massy. The company increased its long-term investments by TT$5 billion or 271 per cent from 2005 to 2014. Massy’s long-term investments are in its long-term working capital, its productive assets and its gross other assets. One of the things that is clear from the annual reports of Massy is that it has increased its working capital by TT$1.8 billion or 295 per cent from 2005 to 2014. The growth in working capital reflects the economic expansion of the group of companies. The expansion often comes about as a result of the acquisition of additional operating capacity through a takeover strategy. Massy used the acquisition method to increase its long-term investment in productive assets by TT$1.4 billion or by 254 per cent over the base period of 2005. It was quite clear that Massy was committed to an all-out strategy to increase its long-term investment for it did not leave its gross other assets behind either. These assets increased by TT$1.7 billion or 262 per cent. However, the substantial emphasis placed on gross other assets over the productive assets might have been another reason Massy saw an overall decline in its efficiency from 2005 to 2014.\
Massy is enjoying success despite the existence of inefficiencies in its operations. Revenues have grown TT$7.2 billion or by 200 per cent during the period in review. Also, profits before taxes grew by TT$541 million or by 142 per cent. All this success is coming from a long-term investment strategy that encompasses expansion through business acquisition and efforts at consolidation of operations. The long-term investment strategy has to be supported by some kind of long-term financing strategy.
An examination of the long-term financing strategy reveals that Massy draws on the inner strengths of the company to finance its long-term investments. The bulk of its long-term investments comes from retained earnings and other equity items. Over the years, internal equity made up about 62 per cent of the long-financing of the company. Internal equity represents resources over which management has direct control. As such, the performance of the group of companies is a reflection of the leadership skills of the organization. For a period, Massy’s reliance on internal equity had dipped to about 50 per cent and it had placed an equal store in external financing. However, within the last few years, Massy has returned to depending on internal resources to finance its long-term investments.
Part of the divergence of leading its long-term financing with internal resources was the acquisition of the Barbados Shipping and Trading Company in 2008. In more recent times, Massy added operations from Colombia and St Lucia to its portfolio of assets. The timing of the Barbados purchase might not have been favourable to Massy for it came in the middle of the economic crisis that hit the global economy in 2008. Some of the companies that were part of the acquired firm had to be jettisoned since the initiative did not produce the results that the Massy conglomerate was looking for. Instead of adding value, the acquisition resulted in the company adding about TT$600 million to its short-term debt portfolio. The company also experienced losses in several of its operations and was forced to discontinue some of them.
Notwithstanding the challenges, Massy has managed to control its customer relations quite well. One cannot speak of, or to, individual experiences, but the economic performance of Massy as a group is commendable. Its ability to recover from the challenges thrown at it during the global economic and financial crisis is testament to the resolve and skill of its management.
LUCAS STOCK INDEX
The Lucas Stock Index (LSI) fell 0.53 per cent in trading during the first period of March 2015. The stocks of six companies were traded with 16,487 shares changing hands. There was one Climber and two Tumblers. The Climber was Sterling Products Limited (SPL) whose stocks rose 0.67 per cent on the sale of 500 shares. The value of the stocks of Demerara Distillers Limited (DDL) fell 4 per cent on the sale of 4,878 shares. The value of the stocks of Republic Bank Limited (RBL) also fell 0.08 per cent on the sale of 500 shares. In the meanwhile, the value of the stocks of Banks DIH (DIH), Guyana Bank for Trade and Industry (BTI), and Demerara Tobacco Company (DTC) remained unchanged on the sale of 10,309; 100 and 200 shares respectively.