Gents Thank you all for the feedback. A number of you have...

Gents

Thank you all for the feedback.

A number of you have clearly outlined that the books balance. That's great. It is also as we would expect. The only way this could be otherwise is for either an innocent mistake to have been made rendering the accounts in error, or for there to have been deliberate fraud. I was in no way, shape or form, suggesting fraud. Nor was I suggesting any error in the accounts.

I am not an accountant, but I think it would be naive to believe that there is not enough wriggle room in accounting standards to enable management to cast profits under a more or less favourable light, in a particular year, if they so choose. I also fully agree with @Schubert^ that cash flows can be lumpy, and as long term investors, we should judge them against the P&L over more than just one reporting period.

What I am far less willing to average out, is the language of management and how this reflects on their candour and transparency. For this was the point of my original post. The question I posed was not whether or not the books balanced, but rather whether or not they supported what management said. So here, once again, is what management said:

"Profit before income tax was $6.187m (2015: $5.607m). Despite the improvement in profitability, cash flows from operating activities decreased largely reflecting the impact of increased company tax payments and increases in inventory and biological assets."

Before I get to the cash flow items, I want to comment on the "improved profitability". It is convenient that in the pcp (Dec 2015) there was an impairment charge to PPE of $576,000. Without this charge the pre-tax profit for the pcp would have been $6.183m. Additionally, in the Dec 2016 period, the interest bill reduced by $193,000. If the interest bill in the pcp had been the same as for the latest period, and in the absence of the impairment charge, the pre-tax profit for the pcp would have been $6.376m, making it much more difficult to claim an "improvement in profitability". Don't get me wrong, these are not massive differences. However, one can hardly claim that there has been an underlying "improvement in profitability".

So, in terms of being receptive to what management are saying, this gets me off to a bad start.

So now lets get back to the cash flows. We can compare the operating cashflows before interest and tax (OCFBIT) against EBITDA, where EBITDA is constructed from normal trading revenues and expenses (ie, excluding impairment charges, PPE sales etc). This, I think, is the best way to examine whether or not reported profits form underlying trading are actually generating the cash that they should be. However, as the OCFBIT will be impacted by changes to the usual key items of working capital (receivables, inventories & payables), then we need to adjust OCBFIT for changes in these items. For simplicity, if we define working capital (WC) as recievables+inventories-payables, and we define the cash consumed by an increase in WC as dWC, then the cash generated by operations (before interest & tax), adjusted for changes in working capital, will be: OCBIT + dWC.

These numbers, should, over time, be well matched EBITDA as long as we subtract the increase in provisions (as provisions are a non-cash expense). If we call the increase in provisions dP, then we will be in a position to compare EBITDA+dP against OCFBIT+dW.

In the case of FRM there is one additional change we need to make. FRM does not charge teh actual cash cost on its bird flock to the P&L. It rather capitalises this as a current asset, and then applies an amortisation charge to the P&L. This cash charge does actually detract from the operating cash flow numbers. As such this will unfairly impact OCFBIT compared to EBITDA (which will not show the amortisation expense). So to compare apples with apples, we need to subtract additions to bird flock from EBITDA. So if we call the actual cash expense of bird flock additions F, then we will be able to compare EBITDA-F+dP against OCBIT+dWC.

So lets do the calculation for the HY ended Dec 2016.

EBITDA = (sales revenues) - (operating expenses #) + (D&A)​

=    $49.158m -    $42.970m   + $6.967m ​

=  $13.155m​

EBITDA - F +dP  =  $13.155m - $5.605 + $0.063m​

=  $7.613m​

​

#: excluding finance costs​

​

OCFBIT + dWC = (receipts from customers) - (payments to suppliers & employees) + (dWC)​

  =    $48.285m -    $46.795m    + $1.576m ​

=  $3.661m​

​

So the cashflow side, as calculated above, falls short relative to the profit side, as calculated above, by nearly $4m. That's quite a quantity, especially when compared with prior reporting periods. It can't be explained by the changes in inventories or biological assets, as claimed by management, as these have been accounted for above. It also can't be explained by the increased tax payments, also claimed by management, as the above numbers are pre-tax. It can't even be explained by changes in the other usual working capital suspects (payables and receivables), as these have also been accounted for.

I provide the numbers for the last several half year periods, below:

	Column 1	Column 2	Column 3
0	6 month period ending	EBITDA-F+dP	OCFBIT+dWC
1	Dec 2016	$7.6m	$3.7m
2	Jun 2016	$6.7m	$6.9m
3	Dec 2015	$8.7m	$8.6m
4	Jun 2015	$4.8m	$5.0m
5	Dec 2014	$7.4m	$7.5m
6	Jun 2014	$5.1m	$5.1m
7	Dec 2013	$1.9m	$2.7m
8	Jun 2013	$3.0m	$2.4m
9	Dec 2012	$2.1m	$2.6m
10	Jun 2012	$1.8m	$1.1m
11	Dec 2011	$2.0m	$3.9m
12

Perhaps I'm missing something.