Thursday, October 9, 2008

Careful, 2 + 2 is not equal to 5

A worrying news item on Bloomberg can be read here. A chinese steel company cannot pay its short term working capital loans. It has suspended production, and, "The company has been having financing problems for a while.'' This by itself is not unusual. What is significant is the company's "net profit more than tripled to 230.4 million yuan in the second quarter from a year earlier". Both items are contradictory. How can a company with large increases in net profit fall into a cash crisis soon after. Unless... the profit numbers were fudged in some way ? Or, the liquidity crisis is much larger than we imagine ? Either ways this is a worry.

Cash is King.

Peter Drucker the father of modern management had a simple rule to identify well managed companies. He wrote - "Good companies pay their bills in time. "

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