Traditionally, during the first quarter of the year (January to March), business news sections of newspapers in the country are awash with headlines pronouncing financial results of companies listed on the Malawi Stock Exchange (MSE). In most cases, the focus has been profit or loss made.
MSE rules and regulations make it mandatory for listed companies to publish their financial statements. This is done, among other things, in the name of transparency to stakeholders.
However, there are also several multi-nationals and conglomerates operating in the country, making huge profits but, sadly, because they are not listed, we are not privy to their financial statements.
This year, headlines such as ‘Illovo profit up 161%’, ‘Standard Bank profit up 125%’ and ‘National Bank justifies 110% profit jump’ graced the business news pages.
In real monetary terms, Illovo Sugar (Malawi) Limited’s profit for the year ended December 2012 stood at K20 billion from K8 billion the previous year whereas Standard Bank saw its profit jump from K3.5 billion to K7.9 billion after tax and National Bank of Malawi (NBM) made an K11 billion pre-tax-profit which hovered around K7 billion after-tax.
Many of us raised eyebrows at the 10-digit-plus profit figures in monetary terms. This was more so given the economic environment our country went through in the past years.
Hence, it was ironical to see companies in the financial services industry and indeed manufacturing sector such as Illovo Sugar registering such huge profits despite the hostile business environment.
But what is a profit? There are several technical definitions, but in the ‘unpacking community’ we prefer simplicity; hence, define it as a positive gain from one’s investment. It can also be defined as the difference between the amount earned and the amount spent in buying, operating or producing a commodity or service.
In the heat of the debate about the so-called ‘astronomical’ profits by companies, especially banks, one of my colleagues, Brenda Twea, asked National Bank chief executive officer George Partridge to explain how it was possible for his bank to make a profit in the region of 10-digits.
Partridge replied: “I don’t think the profit that we [National Bank] made is that astronomical because it is being made with the background of an asset base of K140 billion [about $350m]. If someone had K140 billion, how much profit would you expect them to make?”
From Partridge’s response, one thing that stands out is the fact that usually profits tend to reflect the amount of investment in a business venture as well as its assets. Where the profit is triple the amount invested then surely an observer is justified to raise eyebrows as that is a rip off!
Forgive me if I am sounding like a capitalist today, but, we need to look at the other side of the profits other than the final figures published in annual reports.
Firstly, it is important to appreciate that businesses are investments where shareholders put in their money and expect a fair return. In striving to achieve the desired goals, the shareholders hire managers or directors who are given targets. To meet their targets, the managers devise several strategies including good customer service, customer satisfaction, marketing, innovation and indeed investments in property and other assets.
Besides, they also employ staff to execute their strategies. Now, all this must be within a budget of some kind so as to maximise the profits. This is called efficiency.
I know the tendency by many of us, especially those of us with little or no skills in finance, has been to simply check at the profit section of the financial reports. This in itself does not give a clear picture of how an organisation achieved the stated results. One needs to analyse and scrutinize the entire statement to get to the bottom of it all.
Perhaps it is because of this style of checking financial statements that many of us missed the fact that one of the commercial banks had its profits eaten up by K750 million through provision for bad debts. Debts that were not being serviced, meaning that most of the customers of this particular bank defaulted.
Now K750 million is a lot of money in any currency. How did that happen? That is the billion kwacha question we should be asking. Elsewhere, heads could have rolled, but being Malawi, it is business as usual at the institution. Lord have mercy.
Now, back to my question: What is an ideal profit?