Keep an eye on the future this reporting season

Keep an eye on the future this reporting season

The June financial year end reporting season will begin in earnest next week.

Of particular interest will be management’s outlook given the economic and political uncertainty, especially out of the United States and Eurozone, as well as the rapid changes in technology. These include disruptive financial technologies, robotics, cryptocurrencies and social buyer groups.

This could come through in one of two ways: directly, through management’s commentary about the opportunities and strategies they intend to pursue; or indirectly, through new capital expenditure programs, entries into new markets or the development of new products.

Three of the more interesting global perspectives to look for may be:

Companies whose products are manufactured and sold in different countries and into different industries from agriculture to oil and gas, mining, manufacturing and food processing. Skellerup Holdings, Fletcher Building and Nufarm for example;

Auckland International Airport and Air New Zealand’s views on international passenger numbers and retail spend, which can provide a gauge on the buoyancy of the global economy and global consumer spending;

Companies with exposure to changes in technology such as the recent growth of social buyer clubs like Trade Me, the longer term growth of cryptocurrencies like Xero and Data#3, and the expected arrival of driverless vehicles like Schaffer Corporation, The Colonial Motor Group and AP Eagers.

Of equal interest will be the amount of debt held by each company. Companies with high levels of debt may find it difficult to fund future acquisitions or developments and they may also find it difficult to repay debt without affecting their future dividends should the low interest rate environment reverse.

Companies with low debt levels on the other hand may have the borrowing capacity to fund acquisitions and capital developments if low interest rates remain. Some companies with high valuations relative to their peers and relative to their historic trading ranges, may also consider it an opportune time to raise additional equity capital.

Two other elements to consider this reporting season are working capital balances (i.e. the amount of unsold inventory held by businesses) and EBITDA margins. Both serve as lead indicators as to which products are selling well and which are not. Low margins can indicate product prices have been reduced to sell, driven by low demand or increased competition, and high working capital balances can indicate products have not been selling. Inventories are typically expensive to warehouse and can lead to fire sales or write-offs.

Shareclarity covers almost 150 New Zealand and Australian listed companies, 75 of which will be reporting their full-year results in August and a further 15 will be reporting their half-year results.

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