Are SA technology companies window-dressing their balance sheets?

Johannesburg, 29 April 2003 - What you see is not necessarily what you get when it comes to the cashflow position of JSE-listed technology companies, some of which may not be averse to window-dressing the cash position of their balance sheets over reporting dates.

This is the view of Treacle partner Rudolf Pretorius. Treacle is a specialist venture capital and private equity business focused on the technology sector, which has significant holdings in Datacentrix and ERP.com among others.

“Technology companies are not particularly cyclical in cashflow terms. They can achieve abnormally high net cash positions simply by holding back payments to suppliers prior to reporting dates, thus increasing reported cash at year-end. However, their stretched creditors have to be paid shortly after the year-end, causing cash levels to fall again. The auditing profession has not yet come to grips with this practice,” says Pretorius.

An analysis of the cash balances and interest earned figures for a number of leading JSE-listed IT companies, based on their latest audited accounts, shows clearly that the net cash/debt balances reported at their year-end, other than for Datacentrix and MGX, bear little relation to the average net cash/debt balances these companies must have had during that year.

* Calculated by dividing reported interest earned/(paid) figures with an assumed interest rate of 9% for deposits and 13% for debt, except for Didata and Datatec where corresponding rates of 4% and 8% were used in recognition of the fact that they hold a significant percentage of cash/(debt) offshore at lower interest rates.

Pretorius says indications are that South African banks are tightening their lending criteria to information technology companies in the light of poor results and corporate failures in the industry. It is thus very difficult for IT companies at present to negotiate new credit lines or roll over existing facilities. This squeeze comes at the worst possible time for these companies, many of which are trying desperately to hang on through the slump, waiting for an upturn in demand. In order to buy time and build confidence among investors, banks, customers and staff, hard-pressed IT companies may be using some artistic licence in portraying their balance sheets.

“Next time you see the chief executive of an IT company talking about ‘strong operational cash generation' or ‘Rx million cash on hand,' take it with a pinch of salt. A significant portion of the cash may already have disappeared by the time you get this upbeat message,” says Pretorius