Its acquisition of 40 acres of land in China has raised eyebrows in light of the company’s poor financial performance in recent years.
The transactions amounts to 420% of the company’s revenue for the nine months ended 9MFY2013 and 54% of its cash reserves. As it has been renting the land, it is a transaction that does not appear to provide a boost to income or substantial cost savings in the short term.
With the transactions, it is using up its cash reserves to buy an asset for 133 times its annual rental at a time when it is bleeding money cutting back on production.
The wine maker has seen a sharp decline in its profitability since it was listed in 2010.
Moreover, the land transaction comes at a time when China Ouhua seems to be facing difficulties collecting its trade receivables. Its 86.5 million yuan in trade receivables at the close of its financial year were as large as its inventories then, and its total receivables as at Sept 30 of 72.11 million yuan were also similar to its inventory and more than double its 9MFY2013 revenue.
The transaction also depends on whether the company has no other better strategic acquisitions or uses of its cash. As at Sept 30 2013 it had 242.9 million yuan in cash and cash equivalents, representing 40% of its total assets, 62% of its current assets, and 18 times of its current liabilities. Its cash per share stood at 0.364 yuan. The company has no borrowings.
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