Loading... Please wait...

Big words could mean big trouble

Posted by

I thought that Toshiba (whose origins are in 1875) was a strong market leader, so I was surprised when I read it has become the world’s most recent accounting scandal. I went straight to the investor presentation section of its website … only to find the announcement that … a lot of directors and executives were bailing and leaving the problem to a … “Revitalisation” Committee.

I’ve always been amazed how those in corporate or head/national office dream up bigger words to describe what those in a business unit or state division call a “project” to be done by a “team”. Because there’s been a scandal to a global company, we now have a “Revitalisation Committee” no doubt commissioning “Forensic Accounting Services’.

What did the executives, directors and audit committee miss? Rather than drown in numbers, start with Net Profit and a Profit Ratio and ask:

Q1: Has the business been making money over the last few years? 

                                       


Something went awry in FY 09 but a Net Profit /Sales % of 0.8% is not much. Its target is 5% Return on Sales but Toshiba must have had trouble getting sales or have a high cost structure. It announced an “Action Program to Increase Profitability” in January 2009 - hasn’t anyone noticed it isn’t working? Orange Flashing Light 1.

Q2:  Is the problem in sales or expenses?

The numbers might give us a clue but we need to see what sector the company is in to give us a context. Maybe the industry is in a downturn… maybe…Typing on my Toshiba laptop, my ‘sense’ of the business that it is in is electronics and that is a highly competitive (low margin, high turnover needed) business. Is that right? The images in the report are great but let’s check the numbers. 

                                                                  Segment performance

                          

WOW! Toshiba is in five different, complex sectors that need years of lead time (in terms of business development), industry accreditation and significant R&D investment. The R&D:Sales ratio has flatlined around 5% andDebt: Equity Ratio is 1.1 (= cement shoes). The electronic devices segment is the only "viable" performer.  

Q3: Is Toshiba in the top quartile in key markets (that spend on these products)?

                                                                                     

I googled "top 10 medical technology providers in Australia” and found a report by the Medical Technology Industry Association that showed Japan was 6th at 13% of total medical products (all items). That’s a problem when most buyers of big ticket items benchmark the top three. Orange Flashing Light 2.

Q4:  What does Toshiba say about itself?

These are quotes from the FY 2014 Annual Report:

  • We have the world’s ‘top class competitive power’ and 3D multi-layer flash technology will be available in the latter half of FY 2015 (= no income yet)
  • In our nuclear business, 80% of sales comes from maintenance services and supply of fuels for existing plants(= thin margins, price competitive)
  • We are developing our energy business with a view to promoting exports to Asian and African markets from India (in the future, developing markets, will they pay?)
  • In our Human Start Community solutions (established in 2013) we have participated in 36 demonstration plants … we will accelerate commercialisation…(spent money, no income yet)
  • In our PC business, where sales are hard to expect… we will focus on promising regions and reducing the number of product models (expect? low margin business, price competitive)

All this means that they have spent a lot of money… launching businesses… and developing products for new markets … that they assume will want to buy these expensive technologies … and where they are confident they have the capability to achieve “top three” positioning … at some stage in the future … which is difficult when you are making 0.8% profit.

Here's a quote from the Annual Report:

                                                                                       

Q5:  How do you achieve sustained growth if you are not making money?  

US corporate lawyer, Michael Young (1), who has worked on accounting scandals for the US SEC argues: “Fraudulent behavior rarely starts with dishonesty. Instead, financial misreporting tends to start with pressure for performance that creates an almost irresistible temptation by honest individuals to rationalise to the point where they find themselves doing dishonest things. That is the pattern I have seen over and over again for 30 years."


FOR YOUR BUSINESS UNIT/PROJECT

Two issues to consider
 
  • Products or projects that need lead time to develop then deliver, can be a challenge. Often those above don’t realise the detailed ‘back office’ work that needs to be done. Try to chunk development segments so that you can report at milestones and keep your internal stakeholders on your side.
  • Remember Nobby Clark’s (2) view: “Running a successful business is about Margins, Mixes and Masses. You just have to get the right”. 

Two questions to ask

Being handed unrealistic sales targets is common.

  1. Do you receive the reports from finance that allow you to develop performance metrics which are relevant for what you do?
  2. How can you engender confidence in your product portfolio management skills when you need more than 12 months to deliver result? 

We’ve asked 5 questions, looked at key figures, sector reporting and what the company says about itself and we can see what the directors, executives and audit committee seemed to miss.  And yet we haven't even looked at the financial statements!

...

This blog is for education purposes only.

(1) Young, M: Financial Fraud Prevention and Detection: Governance and Effective Practices (Wiley 2014)

(2) Nobby Clark AO, leading Australian director and chairman





comments powered by Disqus