Bioventix retained earnings

[TheMotorcycleBoy]

Hi folks,

I have been spending some time looking at a firm called Bioventix (BVXP). I would like to obtain the value of "Retained Earnings" for the firm for this year, but alas their recent annual report does not detail such a figure.

I have had a look into the relevant "Statement of changes in Equity" section in the above report and have tabulated the row, which in all the other company reports (i.e. ones which do detail Retained earnings) usually has this figure, below:


After reading some the following notes in the report:

22. Reserves
Share premium account
The share premium reserve contains the premium arising on issues of equity shares, net of issue
expenses.
Capital redemption reserve
The capital redemption arose on the buy-back of shares by the company.
Profit & loss account
The profit and loss reserve represents cumulative profits or losses, net of dividends paid and other
adjustments.

and doing some googling, I am prepared to accept that since this firm currently has fairly simple accounts, that the value described as Profit and loss account can be considered as effectively being the same in value as the Retained Earnings value.

Would anyone on here be able to cast their eyes quickly over the firm's report which I have linked above and give me their opinion on my assumption above?

Many thanks
Matt

[PinkDalek]

Is the answer on page 18 or am I misunderstanding your question (edit: I fact I now see you've taken your figures from there)?

Commencing with Total equity brought forward, adding Total comprehensive income for the year, deducting Dividends: Equity capital and adding Share option charge, resulting in Total equity as at 30 June 2018.

Is not what you are seeking the difference between the £10,144,620 and the £11,010,966 .

PD

PS When you say "firm", I'd say company or sometimes outfit.

[TheMotorcycleBoy]

Hi PD,

Is the answer on page 18 or am I misunderstanding your question (edit: I fact I now see you've taken your figures from there)?
....
Is not what you are seeking the difference between the £10,144,620 and the £11,010,966 .

Well the short answer to your above question is: I don't know. What you've suggested above is stating that "Retained Earnings" is quite simply the change in the Total Equity in an accounting period.

From my "Accounting Demystified" book, I have extracted the following:

Retained profit/earnings:
The total cumulative profits of a company that have been retained. That is not distrubuted to the shareholders as dividend.

I think I'm getting there: I might see if I can work it out (the 2018 R/E) based on what I can figure out from the P&L account from 2017 and 2018's operating numbers.

thanks
Matt

[snagga]

I am prepared to accept that since this firm currently has fairly simple accounts, that the value described as Profit and loss account can be considered as effectively being the same in value as the Retained Earnings value.

I would agree. Retained = not paid out as dividends. The only difference between the company's description of profit and loss account and your book's definition of retained earnings is that the former includes "other adjustments."

These two measures are cumulative amounts - ie. the sum of retained earnings from the inception of the company to date. You said you wanted to know retained earnings "for this year" which I would take to mean profit for 2018 less dividends paid in 2018.

You can compute this from the profit and loss account column in the statement of changes in equity - it shows the profit for the year and the dividends paid in the year as well as the cumulative brought forward balance and the cumulative carried forward balance.

Up to you what you want to do with the share option charge which seems to be the only "adjustment" during the year. I haven't read the specifics of their policy but the general idea is that such a charge arises when a company promises to give free shares or sell shares cheap to employees. The company has to record an expense for that in calculating the profit for the year because it's a real cost of employing people but the company adds it back to equity on this page because there is no liability to pay cash, only an obligation to deliver shares and shares are equity.

[TheMotorcycleBoy]

Thanks for your help, Snagga,

These two measures are cumulative amounts - ie. the sum of retained earnings from the inception of the company to date. You said you wanted to know retained earnings "for this year" which I would take to mean profit for 2018 less dividends paid in 2018.

You can compute this from the profit and loss account column in the statement of changes in equity - it shows the profit for the year and the dividends paid in the year as well as the cumulative brought forward balance and the cumulative carried forward balance.

Yes, I did play with a few numbers over the (hectic) weekend and managed to derive a figure (I think I just subtracted dividends paid out from PAT), and observed this to be "quite similar" to the increment in P&L account entry between the 2017 and the 2018. But as hinted I was a bit too pushed for time to get much bookwork done this weekend.

The thing I'm struggling with is the differential treatment of costs against the amount of earnings which are reported as being retained. Not for this company (Bioventix BVXP) I might add, but just in general.

i.e. the P&L of a company is measured (very roughly) by starting with revenue and subtracting away "cost of goods, sales and admin", interest and tax. And then from this figure dividends are subtracted (and any other charges) and that remaining sum can be assumed as being "retained earnings".

What I don't understand is why "Capital Expenditure" (capex) does not reduce this sum even more?

I'm getting the feeling that I am starting to confuse "Retained earnings" and positive free cash flow......will try to spend some time looking at more examples and probably post back in a bit...

Matt

[TheMotorcycleBoy]

I have been thinking about this one some more. (BTW as far as I'm concerned this thread does not pertain wholly to BVXP - Bioventix anymore).

So I understand now why the subject of "Retained Earnings" is orthogonal to FCF and why capex does not reduce Retained Earnings. It is because Retained Earnings is exactly that, it's just the amount of money/value/in any form that comes from Net income that does not leave the business. That is, it is not paid out of the business to shareholders in the form of dividends. The concept of capital expenditure is different: for example, suppose a business finishes the year with £10m as it's net earnings, and they pay out £1m as dividends. This means that they have increased their Retained Earnings by £9m.....if they originally had £41m of Retained Earnings, then now they will have £50m of Retained Earnings.

However, suppose, carrying on from above, they purchase £5m of fixed assets, then presumably the co. still have £50m of Retained Earnings, since although £5m left the firm to buy the assets, the co. gained £5m of the fair value of the assets. This is distinct to the absolute cash outflow in handing out a dividend....

[snagga]

...Retained Earnings is exactly that, it's just the amount of money/value/in any form that comes from Net income that does not leave the business. That is, it is not paid out of the business to shareholders in the form of dividends. The concept of capital expenditure is different: for example, suppose a business finishes the year with £10m as it's net earnings, and they pay out £1m as dividends. This means that they have increased their Retained Earnings by £9m.....if they originally had £41m of Retained Earnings, then now they will have £50m of Retained Earnings.

However, suppose, carrying on from above, they purchase £5m of fixed assets, then presumably the co. still have £50m of Retained Earnings, since although £5m left the firm to buy the assets, the co. gained £5m of the fair value of the assets. This is distinct to the absolute cash outflow in handing out a dividend....

Yes, that is correct.

Earnings = net increase in net assets from transactions with customers, suppliers, lenders, taxman, etc. [subject to some exceptions and additional complexities like share-based payments]

Retained earnings = earnings less dividends paid out to shareholders

I didn't quite understand the bit about FCF being orthogonal to earnings. Anyway buying a fixed asset is a cash outflow - and I think most definitions of FCF include cash outflows for capex. So paying for a fixed asset reduces FCF but has no immediate impact on earnings. Earnings are subsequently impacted by depreciating or amortising (or if things go badly impairing) the fixed asset - ie. reducing the book value of the asset to reflect it wearing out or becoming obsolescent over its useful life.

[TheMotorcycleBoy]

Hi Snagga,

Sorry I do tend to get a bit deep about these matters!

Retained earnings = earnings less dividends paid out to shareholders

I didn't quite understand the bit about FCF being orthogonal to earnings. Anyway buying a fixed asset is a cash outflow - and I think most definitions of FCF include cash outflows for capex. So paying for a fixed asset reduces FCF but has no immediate impact on earnings. Earnings are subsequently impacted by depreciating or amortising (or if things go badly impairing) the fixed asset - ie. reducing the book value of the asset to reflect it wearing out or becoming obsolescent over its useful life.

I guess what I'm trying to square up is the difference in retained earnings, and free cash flow. Since clearly there is a difference since if not they would not be documented separately.

Clearly both dividend payouts, and money spent on Capex are both outflows, but only dividend payouts reduces retained earnings, however both divs and capex reduce FCF. I think the key difference is whilst both are flows (and require cash behind them), capex brings value back into the business, and hence it is "retained". However with a dividend payout the money basically vanishes.

Why I was curious as to this figure, is because one of my assessments I do on a potential firm/share is bung the numbers from the financial statements into a spreadsheet, and calculate various ratios for comparision. One of those outputs is the Altman Z-score, one of the inputs, in the formula for this is indeed the "retained earnings"

X1 = working capital / total assets
X2 = retained earnings / total assets
X3 = earnings before interest and taxes / total assets
X4 = market value of equity / total liabilities
X5 = sales / total assets

Z score bankruptcy model:
    Z = 0.12X1 + 0.14X2 + 0.33X3 + 0.006X4 + 0.999X5

Zones of discrimination:
    Z > 2.99 – “Safe” Zone
    1.81 < Z < 2.99 – “Grey” Zone
    Z < 1.81 – “Distress” Zone

I'm not sure quite how useful this metric (Z-score) actually is but seeing as I already had a lot the necessary inputs on the spreadsheet, I thought that I may as well work this one out too!

It's interesting that the second expression in the Z-score is (0.14* retained earnings / total earnings) which is reduced if firm pays out a lot in dividends, but is not affected if the firm ultimately reinvests a large portion of it's earnings on Capex, and hopefully towards future growth.

Matt