“THE AIR SEYCHELLES INVESTIGATION” (Part 2)

“THE AIR SEYCHELLES INVESTIGATION” (Part 2)

Before we can proceed with our investigation on the national carrier, it is important for all our readers to understand the concept of a balance sheet and why it is so important to be able to read a balance sheet. If you are going to run a company or invest in companies, (as the people of Seychelles have all invested in Air Seychelles) then we need to be able to read a balance sheet. This is different to knowing what profit or loss a company has made (i.e. reading a profit and loss account). Why? The reason is because a profit and loss account is only half the picture. And “half the picture” is exactly what the CEO of Air Seychelles has been showing and telling us for the last eight years - That Air Seychelles has made a profit for the last eight consecutive years. Is that so? We will certainly find out at a later stage in our investigation.

For instance, Company X might have a turnover of 1 million and expenses of 500,000, thus it has made a profit of 500,0000 and must be doing really well, n’est-ce pas? No, actually. Because what you can’t see from this simple profit and loss account is that it owes the bank 2 million, the 1 million in turnover is very dodgy and there is a 4 million tax bill hanging over its head from previous years’ accounts, a franchise expiring, tax loop hole about to close and a powerful competitor about to start up. Invest in Company X? I do not think so. It is bankrupt and fraudulently trading and not worth a pig’s ear. Stay away. So you need to see a balance sheet to appreciate the real state of the company you are about to invest in. That is because the profit and loss account is not telling you what you really need to know.

A balance sheet has to balance. That is why it’s called a balance sheet. The basic formula you need to know is Assets minus Liabilities = Equity or A – B = C. Into even simpler terms: what you own less what you owe equals what you are worth. This applies to yourself, companies you work for/own and companies you intend investing in.

Let’s have a closer look.

. A: What you own – your assets. Made up of current assets including cash and anything that can be realised (i.e. turned into cash) within say a three-month period (this might include cast-iron debtors, money in transit etc.); stock (stuff ready to be sold and raw materials that have value and can be made into products); any property you or the company may own; equipment and goodwill.

. B: What you owe – your liabilities. This includes your creditors, long-term loans and bank loans. Basically what you would have to find in cash if everyone called in what you owed them.

. C: What are you worth – your equity. This is A minus B. It tells us what you or your company is really worth. There is a formula that says that you take your current assets and divide it by your liabilities and if the answer is bigger than 1.5 you’re doing OK. Obviously, you need to adjust this for different industries and businesses but it serves as a basic indicator. You also take the equity and divide it by the assets as a percentage. And if the answer is higher than 50 you can feel confident. For instance equity 35 million ÷ by assets (capital employed) of 70 million as a percentage = 35,000,000 ÷ 70,000,000 = 50 which is fine. But assets of 120 million and equity of 35 million is not so hot – around 29.

So if you just hear about a company that has made a profit of 1 million and are offered the chance to invest, don’t be impressed by that single figure. Ask to see the balance sheet. Read it thoroughly. In fact, don’t just read the balance sheet, important as it is, there are other things you need to know, such as a company’s financial statements in total. The more information you can get (and should get), the more solid your decision will be. Next week we set out the balance sheet and the financial statement of Air Seychelles for our readers to assess and decide for themselves on the real state of the National Carrier.