Do investors overvalue firms with bloated balance sheets? Noble overstated commodity values by at least $3.8 bln – Iceberg Research

A helpful critical thinking framework relevant for Noble Group, as well as many of the S-chips that include China Environment, the company that Terence, Roy, Shan Rui, Ronald, John have wrote and discussed about.

Journal of Accounting and Economics Volume 38, December 2004, Pages 297–331

Do investors overvalue firms with bloated balance sheets? 

David HirshleiferKewei HouSiew Hong TeohYinglei Zhang


When cumulative net operating income (accounting value-added) outstrips cumulative free cash flow (cash value-added), subsequent earnings growth is weak. If investors with limited attention focus on accounting profitability, and neglect information about cash profitability, then net operating assets, the cumulative difference between operating income and free cash flow, measures the extent to which reporting outcomes provoke over-optimism. During the 1964–2002 sample period, net operating assets scaled by total assets is a strong negative predictor of long-run stock returns. Predictability is robust with respect to an extensive set of controls and testing methods.

Dear All,

Singapore-listed commodities giant Noble Group was recently alleged in an accounting fraud and the reports are useful learning notes for your projects and your other related modules.

Part 2 of the report talks about the fair value (mark-to-market) assets that were used to inflate accounting profits just like Enron and with related-party transactions (RPTs) involved – and they are hidden in “Other Receivables” which we have discussed in class. Part 1 talks about the affiliates, JVs, intercorporate investments and consolidation tricks to shift/hide expenses, debt and losses, just like the case of Olympus that we have discussed in class too.

In the words of our lovely Wen Hong (G2) who has presented the important research paper “Do investors overvalue firms with bloated balance sheet?”, Noble has possibly reached the balance sheet constraint in earnings manipulation (and possible accounting tunneling with the various M&A deal potions with related parties) with the escalating size of the “Other Receivables/MTM” that is financed by short-term rollover debt and equity financing. Ideas and framework, when adapted to the right context, are more powerful than “techniques” in understanding the alleged accounting fraud at Noble Group – and the future Nobles.

From the Iceberg report on Noble Group (Part 2):

MTM are classified as short term assets, but a large percentage are long term One reason why analysts overlook the fair values is that they are not easily found on Noble’s balance sheet despite their size: the positive MTM are found under “Other receivables” in the current assets, and the negative MTM are under “Trade and other payables and accrued liabilities” in the current liabilities. Most people would understand “current assets” as assets expected to be converted to cash within twelve months. In the case of Noble, this is absolutely not the case. In FY2013 for example, 59% of the fair values gains had a maturity beyond one year. The fair value losses are generally short term (only 17% have a maturity beyond 12 months).

Warm regards,


Noble overstated commodity values by at least $3.8 bln – Iceberg Research

Wed, Feb 25 2015

SINGAPORE, Feb 26 (Reuters) – Singapore-listed Noble Group Ltd overstated the value of commodities it holds by at least $3.8 billion, Iceberg Research said in a report on the Asian commodity trading firm’s accounting practices.

“Impairing these fair values dramatically impacts Noble’s performance indicators,” the little-known research firm said on its website on Wednesday, its second report this month raising questions about Noble’s books.

Iceberg released its first analysis on Feb. 15, to which Noble issued a detailed rebuttal.

The company’s shares fell a combined 13 percent in the two trading sessions following the initial report. It has recovered about 1 percent since then.

Noble did not have an immediate comment on the fresh report.

Iceberg Research has in the past declined to comment on its background, analysts and methodology.

Trading in the company’s shares was halted on Thursday morning pending an announcement. Noble is set to report its results later in the day. (Reporting by Aradhana Aravindan and Saeed Hasan; Editing by Stephen Coates)


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