Hastie Group Limited (ASX: HST) today announced that it was appointing administrators, after failing to gain approval from its bankers for a recapitalisation plan of the company's debt. According to the Sydney Morning Herald, a syndicate of banks is facing write-downs totalling almost $250m, on debts of around $500m. The syndicate includes Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Group (ASX: WBC).
Hastie was in discussions with its bankers over the refinancing when it announced last week that $20m in accounting irregularities had been found, dating back to 2009. Apparently, no fraud was involved — instead numbers were "fudged" in order to meet profit forecasts.
What's an audit worth?
We also now find out that the company found $3m of accounting irregularities in its accounts for the six months to December 2011, but both the company and the independent auditors failed to mention this at the time.
One has to wonder about the value of having company accounts audited. Although, according to the Independent Auditors review report, they didn't perform an audit, just a review.
Could this have been foreseen?
Looking at the financials of Hastie, the signs that this company was going to struggle long term were there, accounting irregularities or not.
- Profit margins never got above 5% since the company listed in 2005, and averaged just 2.9%.
- Return on Equity fell steadily each year from 2006, as the company raised more than $222m in new share capital from 2007 to June 2011, despite reporting a total of just $95.6m in profits since listing. That figure doesn't include the loss of $149.1m reported for the six months to December 2011.
- Net tangible assets were negative, with a large portion of assets being goodwill.
- Net Debt to Equity ratio has always been uncomfortably high (over 40%), and supported by constant equity raisings.
- The company included its interest received and paid under cash flows from financing activities, rather than operating cash flow. While perfectly legal, most companies include these costs in the operating cash flow section. With large levels of debt, this accounting malarkey allows the company to report a higher operating cash flow.
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Motley Fool contributor Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).Authorised by Bruce Jackson.
