Footnotes
Footnotes in financial statements (FS) explain accounting entries, which, to a layman, could be too complicated to understand.
Being public investors, they invest on common shares listed on the Philippine Stock Exchange (PSE) based only on guesses that the prices of such-and-such stocks would rise.
Due Diligencer suggests that public investors review the financial statement (FS) filed by listed companies, particularly their retained earnings.
Some listed companies report accumulated losses, instead of their accumulated net profits.
The amount of retained earnings determines a company’s ability to declare dividend either in cash or in stock.
It is usually divided into appropriated and non-appropriated, like what SM Investments Corp. (SM) does in its reports.
In an audited financial statement as of Dec. 31, 2017 and Dec. 31, 2016, SM reported consolidated retained earnings of P229.072 billion and P205.508 billion, respectively.
In the same filing, the company, which is owned by businessman Henry Sy Sr. and his family, explained these entries in what its auditors refer to as “Note 21.”
Note 21 is titled “equity,” under which falls “the amount of retained earnings.”
Under “b” of said footnotes falls the amount of unappropriated retained earnings.
Exclusion
Elaborating on the entry under “b,” SM said, these retained earnings, being consolidated, “include the accumulated equity in net earnings of subsidiaries, associated and joint ventures amounting to P176,587.5 million and P154,730.7 million as of Dec. 31, 2017 and 2016, respectively, which are not available for distribution until such time that the parent company receives the dividends from the respective subsidiaries, associated and joint ventures.”
(Note. Due Diligencer is shortening P176,587.5 million to P176.587 billion and P154,730.7 million to P154.731 billion.)
By deducting P176.587 billion and P154.731 billion from P229.072 billion and from P205.508 billion, the public investors would arrive at P52.485 billion and P50.777 billion.
Of P52.485 billion retained earnings in 2017, SM said in Footnote 21 that it allocated a total of P37 billion as follows: P9 billion for debt servicing of $180 million in 2018; P18 billion for debt servicing of P360 million in 2019 and P10 billion for new investments from 2018 to 2020.
Despite all this, SM said in the same footnote that it paid P7.77 per share, or a total of P9.36 billion cash dividend on April 26, 2017 and P10.63 per share, or a total of P8.536 billion on April 27, 2016.
The company paid these dividends to all stockholders as of May 11, 2017 and May 12, 2016 on May 25, 2017 and May 26, 2016.
Due Diligencer’s take
It is up to public investors who own common shares issued and sold to them by listed companies to analyze the audited financial statements of listed companies before investing.
They should look at listed companies’ financial filings before they part with their money.
The problem, though, is that the public investors may not be aware at all how a listed company has been doing financially.
Because they are outsiders, they may not know anything what the board is hiding inside the boardroom.
What if a listed company reports losses instead of retained earnings? There is nothing that the public investors could do but wait for the next financial report. They could only wish that their money is in good hands.
Of course, there is nothing that the public investors could do in case of reversal of appropriated retained earnings.
Their only hope is a stricter monitoring system that only the Securities and Exchange Commission could possibly put in place.
Forget PSE, in the meantime, because it is also a listed stock like Ayala Corp. and its subsidiary, Ayala Land Inc.
The question that may be asked is, what if one is caught owning a stock that has under equity a deficit of more than P11 billion such as Philippine Telegraph and Telephone Corp. (PT&T)?
Due Diligencer has no answer to the poser. Its only wish for the public investors who have once trusted PT&T is for it to return to profitability. Is this possible? Just asking.
Email: esdperez@gmail.com
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