Consumer-finance lender goeasy Ltd. made a change to its financial statements recently, and it was not a small thing.
At the behest of the Ontario Securities Commission, which was looking over the company’s filings as part of a “continuous disclosure review,” goeasy moved a couple of line items out of one portion of the cash-flow statement and into another. As the company noted in a news release, the change had no impact on the company’s net income, earnings per share, cash position or balance sheet.
The change in the company’s operating cash flow – a measure of cash the company generates in the ordinary course of business – was massive, however.
The company had told shareholders that it had $153-million in operating cash flow (OCF) in 2016; the reclassification turned the number to negative $21-million. For 2017, $179-million in OCF became negative $89-million. Over two years, that’s a swing of $445-million (OCF figures are rounded).
And yet, the markets shrugged. The stock has not moved. Analysts covering the company did not put out notes. This was not “material,” the word for what a reasonable investor would find important, a couple of analysts told me via e-mail.
I think there’s something wrong here, though, when a primary measure of how a company generates cash from its business can swing that much, and no one seems to care. Are we looking at the wrong things – or do financial statements that are compliant with generally accepted accounting principles – GAAP – not matter?
First, let’s dive a little deeper into the company’s history, and the accounting at hand. Goeasy was once known as easyhome, and its primary business was a rent-to-own retailer that sold goods such as furniture and computers to customers on the instalment plan. I actually recommended the company’s stock twice in The Globe and Mail, in 2012 and 2014, but still said: “The idea of a $2,000 [computer] or $3,000 in payments for a basic set of Maytag laundry machines strikes me as absurd.”
Naturally, this experience lent itself to the next line of the company’s business, subprime consumer loans. Now, the renamed “goeasy” gets nearly two-thirds of its revenue from lending, with one-third from the leasing of goods in the old “easyhome” segment. It’s no longer a retailer, it's a consumer finance company.
So, here’s the accounting. Over the past few years, the company decided to move two items out of operating cash flows into the statement of investing cash flows. The company shifted the first, “purchase of lease assets” – that is, what it was paying to buy the stuff easyhome was renting/selling to customers – when it switched from Canadian GAAP to International Financial Reporting Standards in 2011.
Goeasy moved the second, “net issuance of consumer loans receivable” – the money used to make its consumer loans – in December, 2017.
The OSC, which declined to comment, appears to have disliked that approach, and told goeasy to move those items right back into the operating cash flow section.
“We think the changes we made … are supportable, but ultimately, we had a good, rich debate with the OSC, they had a good point of view as well, and we decided to agree to that point of view and restate,” says David Yeilding, the company’s chief financial officer. Mr. Yeilding worked on the OSC matter with former CFO Steve Goertz, who left the company earlier this month. (Goeasy said in April that Mr. Goertz would leave later this year to pursue other opportunities.)
I am not an accountant, but the OSC’s position makes sense to me. Goeasy’s business operations involve acquiring the inventory of goods that it leases, and getting the money to make loans. The costs of those two things seem like operating costs, and therefore cash spent on those costs should probably be in the statement of operating cash flows.
But why does no one care that goeasy took a two-year, $445-million hit to this number? At this stage of goeasy’s life, while the company is still growing its business rapidly, analysts are much more focused on top-line growth and ensuring the company isn’t making bad loans that will come back to bite. Measures of revenue, margin, profit and credit quality are paramount.
It’s worth noting a few things, however. If you endorse this view of what goes in the company’s operating cash flow, goeasy hasn’t produced a positive OCF number since 2013, according to S&P Global Market Intelligence. Subtract the company’s capital expenditures, and the company hasn’t generated positive “free cash flow,” by this definition, since 2010.
The company also pays a dividend; not a huge one, but enough to tally nearly $10-million in the past 12 months. And, concurrent with the expansion of its lending business, it’s borrowing; It had $468-million in debt at March 31, up sevenfold in four years and shifting the company’s capital mix away from equity. It just completed a senior unsecured notes offering July 16 for US$150-million, paying 6.17 per cent in annual interest.
With all of this, I think it’s worth looking closely at whether the company’s business is generating cash, or using it. And with the OSC’s strong suggestion, it’s easy.
David Milstead