Disclaimer: This isn’t funding recommendation, only a tiny little little bit of “forensic evaluation”.
The Social Chain, an initially scorching, however now busted “Social Media DTC” firm was not too long ago topic to an intervention from German regulator BAFIN, claiming the 2021 accounts contained a fabric error within the Cashflow assertion.
In essence, BAFIN stated that The Social Chain’s Working Cashflow did include ~60 mn EUR of non-operating cashflow objects that ought to have categorised both as Financing and Investing Cashflow.
Why is that essential ? Many buyers (myself included) think about “Free Cashflow” as a vital metric. Free cashflow consists of Working Cashflow minus Capex and is typically thought of to be much less simply manipulated than accounting numbers (“Adjusted EBITDA earlier than prices to construct the product”).
Wanting on the headline numbers from the 2021 annual report, we are able to see that regardless of the “adjusted pro-forma” numbers, the +22 mn Working cashflow compares to -23mn EUR in EBITDA and -82 mn EUR Web revenue and appears to generate the impression that the underlying enterprise is money producing, because the funding cashflow was principally M&A:
On the time of the discharge of the report, The inventory was already nicely under its peak however nonetheless 10x increased than it’s immediately, most probably supported by this fairly constructive Working Cashflow:
Each time one thing like this occurs, I ask myself: May one have seen this simply by trying on the numbers within the Annual Report that one thing was not “kosher” ?
Spoiler: Within the case of Social Chain I might say sure and this regardless of a fairly messy stability sheet as a result of a debt financed, vital acquisition of an organization known as DS Produkte, run by this pleasant Gentleman who’s a part of the Forged of Germany’s model of “Shark Tank”:
Again to the numbers. That is how the Social Chain’s 2021 CF assertion seems to be like:
I’ve marked the largest single Merchandise that tturns the -80 mn web revenue into 22 mn positice Working Cashflow, which is on this case a large, 53 mn EUR improve in Commerce payables.
An enormous improve in commerce liabilities as such is at all times warning signal as such, as simply squeezing suppliers shouldn’t be a really sustainable technique.
The primary test one ought to at all times make is to test a suspicious CF assertion in opposition to the stability sheet. And certainly, the quantity as such seems to be (nearly) right because the distinction between Finish of 2020 finish 2021:
Unusually sufficient, the stability sheet would point out a rise of fifty,7 mn EUR and never 53,4 mn nevertheless it’s shut sufficient.
Now nevertheless comes the massive challenge: We all know that The Social Chain acquired DS Produkte and that DS Produkte has been consolidated in 2021 however not in 2020 ansd it was a major acquisition
Because of IFRS notes, The Social Chain has to report the key stability sheet objects of DS Produkte per the primary day of consolidation as of November 1st 2021 within the notes underneath “Enterprise mixtures”:
I’ve marked essentially the most attention-grabbing quantity in Yellow: When The Social Chain consolidated DS Produkte, their commerce payables place elevated by nearly 32 mn EUR.
This improve in commerce paybles clearly doesn’t generate any working money as is solely a consolidation impact. So mainly 32 of the 50 mn improve of accounts payables shouldn’t be recorded within the CF assertion.
This error alone would push the working Cashflow already to -10 mn as a substitute of +22 mn EUR. To be sincere, I’ve little motivation to undergo all the opposite positions within the CF assertion (for such a Shitco), however it’s fairly clear that The Social Chain didn’t appropriately present the impact of the acquisition within the Cashflow assertion.
What can we study from this:
- A comparatively simple sanity test may have proven that one thing is mistaken with the working money move assertion
- Massive acquisitions and consolidation makes it simpler to “fudge” particularly money move numbers
- Shifting between totally different classes of the money move assertion is the best solution to artificially create Working and Free cashflow
- The cashflow assertion as such may also be fairly simply manipulated with out the auditors discovering out
Some open questions stay, for example why the auditors didn’t carry out that comparatively easy sanity test.
In any case, particularly the followers of so known as “serial acquiriers” ought to take money move statements with a giant grain of salt. If you wish to fudge numebrs within the money move assertion, steady acquisitions present many alternatives to make the cashflow stament look a lot better than they really are. So ensure to make these sanity checks for very acquisitive corporations.
