Wednesday, December 16, 2009

Beyond The Smokescreen

Financial Analysis 101 teaches us to take turnover and net income figures of companies with a grain of salt. That's because these numbers are based on items that have been manipulated by management in the not-so-distant past. Hence the recommendation to at least cross check them with the company's cash flows to evaluate their quality. For example cash-trapped Infinity BPO shows a big turnover but hasn't been paying its rent for ages. Granted that hubris and bad management may also be at play here.

Similarly, Sithanen claims that his economic policies have worked as they've created 40,000 jobs. I think we need to cross validate this statement with the savings rate to get a clue about the kind of jobs that have been created. The idea is that if the economy is creating good jobs the savings rate should improve quite a bit -- people should have something to set aside once they've attended to their living expenses. At a minimum it should stay flat.

But as you may now know, the savings rate has plunged to a 30-year low of 12% or if you prefer to less than half its average level over the 15 years preceding the Sithanen screw-up. It looks like a lot of the jobs that have been created haven't pulled people out of subsistence.

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