On July 26, 2016, EROS International Plc. [NYSE Trading Symbol: EROS, $17.87] released its Form 20-F for Fiscal 2016. Prior to this release, EROS reported its unaudited Fiscal Year 2016 results, and highlighted three facts:
- EROS generated positive Free Cash Flow of $21.8 million
- EROS reduced its trade receivables from $198,066 million to $169,413 million
- EROS reduced net debt 19.8% from $161.0 million to $129.1 million
asensio.com’s analysis addresses the meaning behind these statements. It can be accessed here.
EROS headlined their Fiscal 2016 results with “Eros International Plc Reports Free Cash Flow Positive Fiscal Year 2016 Results.” This usually indicates healthy company growth, and is meant to appease their investors. EROS justified their cash flow positive status by proclaiming that this was a result of an increase in their operating cash flows. However, EROS was only able to do this by factoring $39.03 million dollars of accounts receivables, which went into their operating cash flow. Footnote 19 of EROS’s Form 20-F for Fiscal 2016 states:
“The Company factored accounts receivable amounting to $39,026,000 (2015:$Nil) as of March 31, 2016. The cash proceeds from these arrangements are reflected as operating activities.”
When reflecting this figure into their stated positive Free Cash Flow of $21.8 million, as shown by Table I of the attached spreadsheet, if EROS had not factored their receivables, they would have reported a negative free cash flow of $16.2 million. The headline for their press release is false, and could potentially mislead their investors.
EROS’s factored receivables won over investors on another front. In Fiscal 2015, EROS was criticized for their large amount of accounts receivables, and promised to bring them down to around $160 million, which they only missed slightly. While the $29 million reduction in receivables seems like good news for investors, Table II. shows that if EROS had not factored their accounts receivables, they would have an increase of $10.4 million since Fiscal 2015. EROS used the “factoring” tactic to overshadow an overall increase in their receivables from the year before.
EROS’s final proclamation of reduced “net debt” served to be a key highlight in Fiscal 2016, as the company calculates net debt as short and long-term borrowings minus cash and cash equivalents. EROS reduced their net debt by more than $30 million. However, just as Table III. shows, their reduction of net debt isn’t the entire story. EROS’s trade payables increased by $31.9 million, negating their debt reduction.
Upon analysis, it seems that the same highlights that were deemed attractive to investors turned out to be a confirmation of EROS’s worst-case scenario.