Top of Ze World: Part IV

Last edit: 6th April 9.35 am

Found the following comment in my blog entry Top of Ze World: Part III

• Strictly followed Ben Graham, "a good company is a company made more money than it spend", i have no objection to this. But, sorry to say that this statement is too general. Stocks are different from each other, we cannot apply this rule across the board. On the Topglove case, i am of opinion that a good company should employ the profit/equity wisely, either thru' business expansion or returned to shareholders. I personally prefer business expansion. Pertaining to debt, a am of the opinion that some manageable debt is acceptable. Of course borrowings come with a cost. I do agreed with U that the pace Topglove is expanding is to fast.

And here is my reply:

• You see, yes I do agree very much that a good company should employ their profit/equity wisely, which as you have said, either thru business expansion or returning the excess cash back to the shareholders.
  
  And this is the very issue here in Top Glove.
  
  Is Top Glove expanding their business wisely?
  
  Take a very good look at their cash flow.
  
  Based on current numbers... Top Glove recorded a record half year earnings of 38.360 million.
  
  And the very same question I asked back in first posting in Oct 2005, I asked again yesterday, where is the Money? Where is the wealth generated?
  
  In this quarterly earnings, Top Glove mentioned that it's piggy bank cash at the start of the year was 24.812 million. At the end of this quarter, yes cash increased to 46.220 million BUT this was aided by an increase in borrowings of 42.873 million. If you minus out the borrowings, where did that earnings of 38.360 million go? And what if you take into consideration of the depreciation charges of 12.804 million?
  
  Should one be worried that in Top Glove example, we are seeing a company that has been constantly consuming more cash than it generates?
  
  And then what about the end results from Thailand and China?
  
  And asked in the blog postings: 'And how did their current Thailand and China plants results appeal to you?'
  
  Now these are the issues I have raised...
  
  What's one opinion on it?
  
  Do you agree or do you disagree?
  
  For some.. they get worried... company cash flow has not been positive for a long time already, so is it wrong to be worried? Is the justifications to be worried valid?
  
  However... ahhh... the differing opinions.... :D
  
  For some.. it is considered OK.. since they consider that because Top Glove is expanding and has the inspirations to be the TOP GLOVE MAKER in the world. And to be no.1, some sacrifices needs to be made. The company has to use their cash flow to fund the expansions. And if that is not enough, the company has to borrow more to fund the expansions.
  
  Ahh... do you see the differing opinions?
  
  Which is right?
  Which is wrong?
  
  I have no idea... me just raised the issues only via my mumblings...

here's a reply from 2nd brother on this issue.. 6th April 8.00 am

• Accordingly to Robert Hagstrom in (The Warren Buffett Way) and Phil Fisher in (Common Stock Uncommon Profit), how a company employ its cash depend on the stage of a company/business. At Topglove, it is at growing stage (Stage 2). It is growing so fast, every dollar they made have to plunge back for expanding the business. The profit itself is not sufficient enough for increasing production capacity, Topglove need to borrow more money to expand. Therefore, cash in hand is not a good tool to measure the company.
  
  As business expand, of course the increased of working capital is a by-product. Strictly follow the latest quarter report, there was an increse of 30++million in working capital. Another 45 millon was spend on the production lines.
  
  Althought the cash flow is not "pretty enough", i personally feel that it is not a alarming sign yet.
  
  What i want to say is all these cashflow/ debt level are depend on the stage of a company.
  
  Strictly followed Phil Fisher and Micheal Porter, low-cost producer would win especially in the commondity game. Since Topglove is the low-cost producer, i think they would win in this game.
  
  In glove industry, scale of economy is crucial. Topglove yet to achieve scale of economy in China, so the reported profit would not be impressive. Maybe we would see some improvemnt in the offing.

Reply (April 6th 9.35 am):

For me, it depends on what one seeks for when they invest in a company. Now as mentioned many times before, the key to a successful investing is pretty much simple. One seeks to invest in a good company at a cheap price. And obviously the very key to this simple statement is the definition of 'good' and 'cheap'.

Now let's take the issue of good. What is considered good? Some wants to see the creation of wealth and on the other hand, one wants to see the company simply grow. And on the other hand, some see both as a must in their definition of a good company. They want to see the creation of wealth and they also want to see the company grow. And of course, such opinion simply varies.

Me? I would want to see the creation of wealth but yet I also want to see growth... LOL!! ... yalor.. I am way too demanding... :D

Ahh... am I wrong to be so selective?

For sure, some finds it acceptable to have an aggressive company, deploying every single cash back into the business for the sake of expansion. And if they have to, borrowing is needed. As mentioned again, such sacrifices is a must if the company wants to grow.

For some, they might ask if such management practise is prudent? For they would argue that expansion is a must BUT it must not be made at all costs. Spending all the cash flow and incurring loans to fund such expansion might be considered excessive. The arguement is that nothing truly great is made via fevered acquisitions of companies and that frequent acquisitions are a sign of weakness, of misplaced priorities and of the inability to enhance worth from within. For them they would rather see their company grow from their own funding. For them this is the real worth. Else they consider it as artificial engineered growth.

How?

Two school of thoughts. Yes?

Well, since I am one that wants to see the worth and yet one want to see the growth, perhaps it would be better if I explain more in terms of my views on what is happening in Top Glove.... (sorry.. let me start a whole new posting else this posting will be way too long..!!)

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ps... I have turned this into a whole new blog posting into a discussion and if any1 wants to have their say, you are more than welcomed......