Megan: Part XI

Found this very interesting comment posted by Grow_Thru_Life in the blog posting, Megan: Part XI

• Anyway, regarding MEGAN, just my humble personal opinion, they set the depreciation charges from 20% to 10%, that means its machine can be used for 10 years.(I doubt we're still widely using DVD after 10 years :) They could upgrade it to HD-DVD but R&D is spent more on blu-ray instead. That's another topic so just ignore it for now.)
  
  Let us roughly count it from RAM's report.I'll have to ass-u&me here, sorry for that. 33 DVD lines (19m/line)still undergoing depreciation charges, 20%/annual = ~31.35m , as they reduce it to 10%/annual, there's a whopping 15.675m reduction in operating expense. (Anyway, the depreciation charges are 18.1m to be exact in the quarterly report) That explains the turnaround EPS. Is this consider a manipulation of accounting?
  
  I recalculate the EPS, assuming tax is the same but depreciation charges at 20%/annual, it's roughly only 0.01. (what a difference!)
  
  Anyway, I assume some investors will look at the EPS and buy the share, so price might be up a while until they notice it's another trick. (I was a buyer of MEGAN myself with huge(%wise) losses) Let's see. I might be wrong altogether.

Many thanks for the comments. It's extremely interesting that you have discovered that there's a huge variance in depreciation charges. And yes, logically speaking, when one decreases the depreciation charges, the end result will see an increase in the company's net earnings.

So, is there an attempt to deceive the investors by decreasing the rate of depreciation?

Is there an attempt to manipulate the numbers to make Megan's earnings look attractive?

How?

Is this cheating by Megan Media?

For me, I have always believe that accounting is just a starting point in our investment and that our investment should never be based solely on numbers, figures and yardsticks.

But this is just me. And in the stock market, opinions and views will always differ and that there will be many an investor who would invest based on numbers.. :D

Anyway, take the earnings per share issue.

Of course, with the huge reported jump in earnings, this might seduce those investors who has their eyes soley fixed on numbers, hence it would surprise me not if this share garners some buying interest.

Would I follow?

Nope.

Let me put this Megan into a whole new perspective. Let's ass-u-me Megan to be a guy called Joe and the would be investor of Megan to be Kathy, a gal.

Now Kathy and Joe are like boyfriend girlfriend and ass-u-me that Kathy is kinda a bit more realistic in life (kaka.. some might call her a money face hor)

So the reason Kathy goes out with Joe is that Joe is a up-coming young executive. (good prospect mah) Earning more and more money each single year or at least this is what Joe tells Kathy.

So recently, Joe tells Kathy that because of this new job prospect, which will pays him so much more salary, he needs to invest in himself. And to do that he needs to borrow more money. And after all the investments, Joe finally gets the new job and the much higher salary.

However, Kathy felt that something is not right somewhere. Despite the higher paying job, this Joe always no money one. Whenever they go 'kei-kei', Kathy always end-up paying the bills for one reason or another.

So Kathy decides to look deeper... (LOL!!... yeah, money face but isn't it logical for Kathy to check Joe's accounts.)

Now despite his higher salary, Joe's bank account has been depleting. Kathy wonders how can? She has been paying for most of the expenses. And then she discovered Joe's loan statements. Now despite getting more salary, Joe's loans keep increasing and increasing.

How? Kathy is wondering big time if Joe has been bruffing her on his salary and she totally cannot understand why Joe's personal loans keep increasing all the time. (Maybe Joe is cheating on her and Joe got another gal? Maybe Joe got gambling habits? Maybe Joe is a pure simple bull-shitter? how?)

Guess what Kathy should do....

:D

LOL!!!.... dunno whether me story telling is good or not.... :D

anywayyyy...

Now let's put Megan back into perspective.

Think of Megan's earnings to be the same as Joe's salary.

And ask ourselves a simple question: If Megan's earnings per share is really solid then how come Megan's cash keeps depleting?

Take this recent quarter as an example. Megan's earnings was reported at 19.8 million.

Fantastic.

But look at the cash balance. Think of yourself as Kathy, checking on Joe's bank balances.

Last quarter, Megan had 97.587 million in cash equivalents. This quarter? 54.370 million. WoW! Cash depleted some 43.217 million!

Where did all the Moola go?

For a company that announced it earned 19.8 million... why did the cash deplete by some 43.217 million?

And then the loans. Loans increase by another 25.040 million.

So how?

Again... if you are Kathy... and this is how Joe's personal finance looks like... would you stay or would you go?

And from a business perspective, say this company tells you it made some 19.8 million in cash, but its piggy bank decreased by some 43.217 million and its loans increased by some 25.040 million.... do you see any wealth creation within the company? Or do you see farther destruction of value within the company? If so, would you be a sucker to invest in such a company?

Again simple commonsense reasoning isn't it?

Anyway... the share price. LOL!!... would Megan see some upside or downside? I have no idea BUT from a business perspective or investment perspective, does it matter how much Megan trades? If a company makes 19.8 million and one cannot find any wealth creation within the company, does it make sense to invest in it at a cheap price? ie if Megan falls to 40 sen, would you buy?

Do you belive in the investing method of investing in a lousy business at a cheap price?

Or would it rather make more sense to invest in a good quality business at a cheap price?