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Cash & Bank Balances
Issued Capital & Treasury Shares
Deferred Tax Liabilities
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Cash & Bank Balances
There is nothing much to explain on cash and bank balances, as the name explains itself. However, what I would like to highlight is to always look at this line item together with other cash equivalents and borrowings. Under the Current Asset, notice there is an Investment in Unit Trust. In reference to Note 19 in page 100 of the annual report, TexCycle disclosed that:

Approximately 69.8% to 99.8% of the unit trust’s net asset value will be invested in medium to long-term government bonds, private debt securities and fixed income instruments. The balance shall be allocated to equity instruments, cash deposits and short-term money market instruments.

Thus, the investment can be considered as being close to cash equivalents, as unit trust can be redeemed with ease. In addition, fixed deposits, money market placements, and short-term investments are to be included as “cash equivalents” as well, and the main principle is that these items are liquid enough to be converted to cash.

Back to TexCycle, on debts, TexCycle has RM3.5 million of non-current term loans and RM0.45 million worth of current term loans, bringing total loans to RM3.95 million.

Texcycle’s net cash position would be:

= Cash and Bank Balances + Investment in Unit Trusts – Total Debts

= RM5.7 million + RM6.9 million – RM3.95 million

= RM8.65 million

The point to stress here is that debts must be taken into consideration. If investors do not take debts into consideration, a company can easily take a substantial amount of loans and hold them as cash, giving the impression that the company is cash rich. In addition, cash or cash equivalents that are restricted or have conditions placed on them should be excluded in the calculation.

Issued Capital & Treasury Shares
Table 5 summarises Note 21 in page 101 of TexCycle’s annual report.

Table 5: Share Capital & Treasury Shares
No. of shares In RM
2015 2016 2015 2016
Ordinary shares issued and fully paid up 170,793,000 170,793,000 17,079,300 17,079,300
Treasury shares:
At beginning of the year 1,681,100 1,832,700 806,381 895,451
Repurchased during the year 151,600 103,000 89,070 122,430
At the end of the year 1,832,700 1,935,700 895,451 1,017,881

Ordinary shares issued and fully paid up is the total number of shares issued by TexCycle. Assuming if the share price of TexCycle is RM1.00 each share, then the value, or market capitalisation, of TexCycle would be RM170.793 million (RM1.00 x 170.793 million shares).

Treasury shares exist when a company buys back its own shares. Under the Companies Act, 2016, companies are allowed to buy back up to 10% of the issued and fully paid up number of shares. The value of the treasury shares recognised is based on the price paid for the buyback of shares. Further details on the buyback can be found in page 51 of the annual report, under Additional Compliance Information.

It is common for companies to buy back its shares. Such action usually sends the signal that the company perceives its shares as undervalued.
Deferred Tax Liabilities
Deferred taxation is a major topic itself and we will not go into it in details (at least for this book). But to understand the background of why deferred tax exists, as explained in Chapter 8: Income Statement – A Measurement of Profitability, profits reported in the income statement is guided by accounting standards, but tax payable is guided by Inland Revenue Board rules. While income statements are prepared using the accrual concept, tax payable is calculated based on cash receipt basis. Thus, profits calculated based on accounting standards is known as “accounting profit” whereas profit calculated based on tax rules is known as “taxable profit”.

Due to the accounting rules following accrual concept and tax rules following receipt concept, it is possible for a company to incur a tax liability (or the need to pay tax in any future periods) in a financial period and pay it during a much later period or over multiple periods, vice versa. A simple example would be an interest income recognised on accrual basis in one financial year, but with the payment only received in the following financial year.

As a simplified summary, deferred tax serves:

  1. To ensure the tax expenses in the income statement is attributable to the profit for the financial year; and
  1. As an estimation of future tax liability based on the company’s assets and liabilities.

Again, this is an overly simplified explanation on deferred tax. However, one salvation for analysts is that deferred tax does not affect cash flow of a company, which is the next topic we will cover.

In the next posting, we will talk about Minority Interest.

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