Did Nova prop up books?
CALCULATION SHOWS A COMPANY IN THE RED, BUT THE PROPERTY GROUP PREDICTS OTHERWISE Its conclusion is based on an outdated risk assessment tool.
The Nova Property Group believes its financial position is improving, but a Moneyweb analysis of a risk assessment model suggests the company may face a “high risk” of bankruptcy.
Nova, the Sharemax rescue vehicle, published a “Communique” in December last year providing an overview of the group’s operations and future plans.
It is Nova’s only communication with former Sharemax investors and other stakeholders in a year. Moneyweb previously reported on several significant announcements Nova made in the communication and the group’s total silence on when it plans to repay investors.
This article focuses on the financial information Nova included in the document, which the board, under the leadership of chair Connie Myburgh and CEO Dominique Haese, believes shows the company’s financial health is improving.
However, a Moneyweb analysis suggests the board based its conclusions on selective information, which may well present a flawed picture of its financial health.
Nova’s financial analyses are limited to one liquidity and one solvency ratio but omit several other ratios, which reveal a much more depressed financial position.
The company also disclosed a calculation of its Altman Z-Score. This is a risk assessment tool many investors, creditors and analysts use to measure the likelihood
of the company going into bankruptcy, which revealed that Nova faces a “moderate” risk of going bankrupt.
However, it seems that Nova used an Altman Z-Score model initially designed for a listed manufacturing business instead of more appropriate models aimed at private companies in developing countries.
The calculation of the Z-Scores according to these more appropriate models reveals a company with a “high” likelihood of bankruptcy.
Financial ratios
Nova included analyses of only its current and debt ratios for the past seven years in the communiqué.
Although the current and debt ratios are critical and frequently used measurements of a company’s liquidity and solvency, they should not be seen in isolation.
Nova’s analyses excluded several other liquidity and solvency ratios, which should be viewed with the current and debt ratios to provide a more holistic view of the company’s liquidity and solvency positions.
Virtually all of these omitted ratios paint a different picture of the company’s financial position.
Moneyweb crunched the numbers and calculated three relevant ratios to provide a more comprehensive view of the company’s ability to pay short-term debt and operating expenses.
Nova’s current ratio seems healthy as it exceeds the generally accepted benchmark of 1. Nova’s debt ratio remained constant at around 0.9, which means 90% of
company’s assets are financed with debt. Therefore, these two ratios reflect some positive news regarding Nova’s solvency and liquidity.
However, the ratios Nova omitted are not as optimistic. The quick and cash ratios measure a company’s ability to fund short-term obligations with its most liquid assets, such as cash and accounts receivable.
Nova’s quick ratio is 0.34 for its most recent financial year and only a third of the generally accepted “good” benchmark of around 1.
The 2023 cash ratio is even more concerning as the ratio of 0.02 is a mile from a generally accepted 0.5 norm.
If all of these ratios are seen together, and the fact that since 2012, Nova has never reported a positive cash flow from operations, it reveals a company facing liquidity challenges.
Altman Z-Score
Nova also discloses its Altman Z-Scores for the past seven years. It is a technical analysis of various financial ratios calculated from information in a company’s balance sheet and income statement and predicts the likelihood of bankruptcy.
The analysis shows that Nova’s position has improved significantly since 2017, but the 2023 score of 2.3 remains below the 3-point mark, indicating a “moderate” risk of bankruptcy.
However, it seems as if Nova used the incorrect Altman Z-Score model. Altman updated the model to be relevant for unlisted non-manufacturing companies. It’s called the Z’-Score model. Another update followed for unlisted companies in emerging markets, the so-called Z”Score model.
These two models are much more relevant to calculate Nova’s scores.
According to these adapted models, Nova’s Z-Scores fall in the bottom categories, indicating a “high” likelihood of bankruptcy.
The adapted models therefore echo the financial ratio analysis that its financial position is concerning and has deteriorated over the past three financial years.
Nova did not reply to detailed questions about its Z-Score calculation and why it did not use the more appropriate Altman models.
Nova’s financial analyses are limited to liquidity and solvency ratios only
Sale of properties
Nova inherited 28 properties from Sharemax in 2011 and has since then sold 19. The sale of these properties yielded R635 million in cash, of which only R177 million was returned to debenture holders.