ECB Balance Sheet Liabilities: some notes.

As promised in a previous post, I will analyze the other side of the ECB’s balance sheet: Liabilities.

Anyone who is interested in the information provided weekly by the ECB about its balance sheet can go to the webpage:

http://www.ecb.europa.eu/press/pr/wfs/2012/html/fs120612.en.html

First of all, this is the Liabilities side as of 1/06/2012:

Liabilities	01/06/12
Banknotes in circulation	884,88
Liabilities to euro area credit institutions related to monetary policy operations denominated in euro	1.091,70
Current accounts (covering the minimum reserve system)	94,02
Deposit facility	784,97
Fixed-term deposits	212,00
Fine-tuning reverse operations	-
Deposits related to margin calls	0,71
Other liabilities to euro area credit institutions denominated in euro	3,40
Debt certificates issued	-
Liabilities to other euro area residents denominated in euro	129,03
General government	118,09
Other liabilities	10,93
Liabilities to non-euro area residents denominated in euro	116,42
Liabilities to euro area residents denominated in foreign currency	5,49
Liabilities to non-euro area residents denominated in foreign currency	9,28
Deposits, balances and other liabilities	9,28
Liabilities arising from the credit facility under ERM II	-
Counterpart of special drawing rights allocated by the IMF	54,72
Other liabilities	222,88
Revaluation accounts	399,45
Capital and reserves	85,36
Total liabilities	3.002,59

As in the previous post we will analyze account by account (but just the most important ones) the BS, trying to understand what the ECB puts en each of them.

Banknotes in Circulation (884,88): In this account we can find the physical euro supply. 30% of the ECB’s balance sheet is made of banknotes, actual euros issued by the ECB. This is part of the base money supply, the other part is the reserves and deposits held by banks in the ECB’s accounts. Paper euros, therefore, are liabilities of the central bank that are supposedly backed by its assets. When the ECB wants to increase the money supply it buys assets to private banks (or lends them assets) and gives them newly created physical euros or newly created deposits that banks can use to lend to clients or buy assets to other firms or individuals. Lets see the second account because the first two parts of the BS can be analyzed together, given that together are called the Base Money Supply, a concept that we will discuss later.

Liabilities to euro area credit institutions related to monetary policy operations denominated in euro (1.091,7): More than 36% of liabilities of the ECB are liabilities to euro area credit institutions related to monetary operations denominated in euro, that is deposits held by private banks in the ECB. So 66% of the ECB’s balance sheet is made of banknotes and demand deposits, that we can call “no term” liabilities because they can be withdrawn anytime by private banks. As we said, these two accounts together form the monetary base, that is the amount of money issued by the ECB. However, this is not the total money of the economy because private banks can expand the money supply due to a special privilege called fractional reserve banking. In the following link brief explanation of the concept of monetary base and fractional reserve lending can be found (http://en.wikipedia.org/wiki/Monetary_base). There is usually a connection between the monetary base and the total money supply, because an expansion of the monetary base usually translates in an increase of bank credit through the process of fractional reserve banking. However, during an economic crisis and a period of deleverage, even if central banks try to increase the quantity of money an credit in the economy, private banks do not expand credit on top of the monetary base at the same peace because banks have a small capital base, no creditworthy clients and a lot of loan defaults and therefore do not lend. The process of money and credit creation will be the argument of another post, now I want only to stress the fact that these two accounts should be monitored in order to see the increase or decrease of the monetary base. Now we are going to analyze each account separately, because we can understand a lot of interesting stuff.

Current accounts covering the minimum reserve system (94,02): Usually when the central bank buys assets to expand the money supply, it creates deposits in favor of the private banks that sold those assets. Then those banks withdraw these deposits and use them to expand credit. However, banks cannot use all the deposit, they have to keep as reserve at least the minimum reserve requirement, fixed by the central bank. Let’s make a simple example. The ECB wants to expand the money supply by 100. To do this it buys an asset held in bank’s A balance sheet and it pays for the asset creating a deposit of 100, that is a liability of the central bank and an asset of bank A. Then, bank A withdraws the deposit and uses it as it pleases. However, if the central bank decides that the minimum reserve requirement is 10%, bank A can only withdraw 90 and must let 10 as a reserve. In this account we can find the required reserve that banks need to keep at the ECB.  

Deposit Facility (784,97): This is one of the most important accounts of the ECB’s balance sheet. It is one of the measures that show the level of stress in the economy and in the interbank market. When private banks use this facility they get paid just 0,25% on funds deposited. However, they could just use the money to lend to other banks or other clients and earn a higher return on the money. Why private banks prefer a lower interest rate instead of lending money and get paid much more for it? Because these banks do not trust clients or other banks and therefore they prefer put the money in a safe place rather than risk this money lending to someone else. In the graph below we can see the evolution of this account from the beginning of 2008 till now:

The first huge increase occurred when Lehman Brothers went bankrupt. It increase from almost zero to 200 billions. Then it came down again but it peaked again to 300 and almost 400 during 2010. During 2011 it came down again but in the end of 2011 and during 2012 it increased again to levels never seen before reaching 800 billions. This huge increase happened after the ECB implemented the two LTRO’s (long term refinancing operations) in December 2011 and February 2012 for a total amount between 600 and 1000 billions. The evolution of this account tells us that the monetary expansion orchestrated by the ECB did not reach the goal proposed: reactivate the economy. Instead, this account tells us that private banks took the money and, instead of loan it to clients, they deposited it again in the central bank. This is why this account is so important: it is a signal of the stress in the economy and a signal that central banks cannot decide exactly the level of money supply because if banks do not lend, the so called money multiplier does not work and the increase in the monetary base does not reflect in an increase in money and credit in circulation.

Fixed-term deposits (212): As in the previous account, this is money deposited by private banks in the ECB. The only difference is that these are time deposits while the others are overnight deposits that can be withdrawn whenever a private bank needs to.

The other accounts forming this section are much less important and I will skip them. However lets take a look to the following monetary base graph:

We can see how the monetary base increased from around 800 to 1.800 billions in just 5 years with the biggest increase in the last year (an increase of 800 billion, i.e. an increase of 80%). Remember that the monetary base is the sum of Banknotes and Liabilities to euro area credit institutions. Despite this huge increase, there was no beneficial effect in the economy and this is obvious because an increase in liabilities of ECB is not an increase in wealth and physical goods, it is only a redistribution of wealth. Moreover, banks, for the reasons discussed before, are not expanding credit on top of the monetary base expansion and therefore there is less impact of the monetary policy in the economy.

Liabilities to other euro area residents denominated in euro (129): Most of these liabilities are government liabilities (118), that is money owed by the ECB to EU member states.

Liabilities to non-euro area residents denominated in euro (116,42): These are liabilities that the ECB has with institutions that are located outside the euro area.

Counterpart of special drawing rights allocated by the IMF (54,72): The ECB owes almost 55 billions to the International Monetary Fund and this debt is recorded in this account.

Revaluation account (399,45): When the ECB considers that the value of some of its assets is higher than the value at which those assets are held in the balance sheet, it revalues upward these assets and recognizes this increase in its equity. Therefore these 400 billions are just the recognition that some of the assets have a higher value than initially recognized. For example, if the ECB has recorded its gold reserves at 1.000 euros per ounce and thinks that the price of gold will be stable around 1.500 euros per ounce, it can increase the value of its ounces in the balance sheet and recognize the 500 euros per ounce in Equity. Right now gold is valued by the ECB at 1250 euros approximately. This means that gold is almost marked to market because it is trading around 1250 euros per ounce. If gold price plummets to 1.000 euros (that is 20%, not a crazy scenario, even if improbable) and the ECB really marks to market gold, it would lose 86 billions in reserves.   

Capital and reserves (85,36): This is the equity of the ECB equivalent to 2,84% of total assets. It means that if ECB’s assets lose 3% of their value all the ECB’s capital would be wiped out and the ECB would be bankrupt. However, the ECB has also 400 billions of revaluation reserves that could be considered equity and therefore it could afford higher losses: 15% of assets. Nevertheless, probably these 400 billions in reserves reflect an inflated value of some assets, probably not market to market but marked to fantasy. All peripheral sovereign debt is valued at par and, in case of default of one or more countries, the ECB could face huge losses, even if bonds held by the ECB are ranked senior to privately held ones, as it was clear when Greece defaulted. Therefore, the financial position of the ECB is not that healthy given a leverage of 35 (Total Assets/Equity). Some people think that ECB’s financial position does not matter because it can just print money and bailout itself. However, we must consider that money is a liability for the ECB and it is not possible to decrease liabilities issuing more liabilities. Every time the ECB issues money, it increases its assets and liabilities and therefore the equity position is not affected. One way to recapitalize the ECB is to increase its assets while leaving its liabilities unchanged. This can be done, for example, by European states giving some of their sovereign debt for free, as a present. In this way assets would increase without a correspondent increase in liabilities. However, European states are already too much indebted and doing this would increase their debt burden and worsen the economic crisis.

I realize that this is not a complete discussion of the ECB’s balance sheet but I think it could be useful to understand this important institution. There are a lot of other considerations that should be done, like discussing in more detail how the monetary policy is implemented and which are the facilities used to implement it. Maybe I will do that in another post in the future.   

ECB's Balance Sheet tutorial (Assets)

ECB Balance Sheet: some notes.

The European Central Bank (ECB) is the institution responsible for the monetary policy within the European Union (EU). In this post I will analyze in some detail the balance sheet of this institution (account by account) to explain the meaning of the different entries.

Anyone who is interested in the information provided by the ECB about its balance sheet can go to the webpage:

http://www.ecb.europa.eu/press/pr/wfs/2012/html/fs120612.en.html

Every week the ECB publishes the balance sheet and anyone can see what happened during the week, which accounts changed, and what is the meaning of this change. I think that this brief tutorial can help readers to understand what is going on in the present crisis, given that the Central Banks is one of the most important agents in the economy. I will begin with the asset side of the balance sheet going, as it is presented in the webpage, from the most liquid asset to the less liquid one. This is the asset side of ECB balance sheet as of 01/06/2012 (in billions):

Assets	01/06/12
Gold and gold receivables	432,70
Claims on non-euro area residents denominated in foreign currency	243,60
Receivables from the IMF	86,08
Balances with banks and security investments, external loans and other external assets	157,52
Claims on euro area residents denominated in foreign currency	49,08
Claims on non-euro area residents denominated in euro	28,00
Balances with banks, security investments and loans	17,59
Claims arising from the credit facility under ERM II	-
Lending to euro area credit institutions related to monetary policy operations denominated in euro	1.115,52
Main refinancing operations	51,18
Longer-term refinancing operations	1.063,63
Fine-tuning reverse operations	-
Structural reverse operations	-
Marginal lending facility	0,71
Credits related to margin calls	0,00
Other claims on euro area credit institutions denominated in euro	250,59
Securities of euro area residents denominated in euro	605,11
Securities held for monetary policy purposes	280,82
Other securities	324,29
General government debt denominated in euro	30,58
Other assets	257,82
Total assets	3.002,59

Gold (432,7): The most liquid asset in a central bank balance sheet is gold. Even if economists (i.e. Keynes) and famous investors (such as Warren Buffett) think that gold is a “barbarous relic” central banks have a lot of gold in their balance sheet (some have more and some have less). The importance of gold is that it is an asset that is not a liability of another counterparty. If ECB owns dollars, it faces counterparty risk (even if it is considered minimal) because the dollars are liabilities of the Federal Reserve (FED) while gold is an asset that does not have any counterparty risk. In the present economic crisis some central banks, especially emerging countries’ ones, have been increasing their gold reserves because in the present deflationary situation, gold has a good behavior. Usually gold is seen as a protection against inflation, but it is not true. Other assets offer better protection than gold in an inflationary situation (commodities such as oil, food, meat etc.). However, in a deflation and in a credit crunch (situation in which there is a huge destruction of credit) there is an increase in counterparty risk (the risk that a counterparty defaults on its obligations) and the demand for gold increase and as a consequence its price. So gold is a good asset in a situation like the one we are facing right now. We need to remember that gold was money till the expropriation that occurred in the beginning of the 20^th century. It looks like many years ago, but we need to remember that the last official link between gold and paper money was broken in the seventies with the suspension of gold payments from the Nixon administration. I will not extend more on money and gold because it is an argument for a full post or even an article or a book. Lets concentrate on ECB’s BS.

Claims on non-euro area residents denominated in foreign currency (243,6): These claims are assets held against the International Monetary Fund (86 billion receivables) and other assets held against foreign banks and other foreign economic agents (157,5). If ECB buys dollars, or buys some other liquid asset denominated in foreign currency, it puts these dollars or assets in this account. Here we can find also loans denominated in foreign currencies or deposits at foreign banks.

Claims on euro area residents denominated in foreign currency (49,8): the concept is the same but these assets are denominated in domestic currency (euros).

Claims on non-euro area residents denominated in euro (28): same concept but these are assets in euros that are liabilities of non-euro area institutions. I will not extend on these accounts because these are not the important part of the ECB’s balance sheet and their amount is not that relevant.

Lending to euro area credit institutions related to monetary policy operations denominated in euro (1.115,52): This is by far the most important account of the BS from a quantitative point of view (it represents 37% of the BS) and from the qualitative point of view. This is where most of the magic of money creation happens. By far the most important account of this part is the “Longer Term Refinancing Operation” (35% of the BS). Here the ECB buys (or “lends” because the agreement presupposes that sometime in the future ECB will sell again these assets to the same banks) assets to private European banks in order to expand the money supply. The process is simple: when the ECB needs to inject liquidity in the system it buys assets from private banks or, if we want to be more precise, lends money to private banks in exchange for good collateral. How it pays for these purchases? Well, it creates liabilities such as physical paper euros or just new deposits (liabilities of the central bank but assets of the private bank) that private banks can use to lend or purchase assets. As a collateral the ECB used to ask good assets, i.e. assets with triple A rating or sovereign bonds, considered (mistakenly) risk free. The central bank wants good collateral because if the private bank cannot repay the loan, the ECB still has a good asset that can sell in the market in order to get back the euros and decrease the money supply. So the central bank can decide how much money supply there is the economy buying (or lending against a collateral) more or less assets and increasing or decreasing the quality of the assets that it accepts as a collateral. We are not saying that the central bank can decide exactly how much money and credit will be supplied in the economy. The CB can only increase or decrease the monetary base (physical euros and deposits of private banks held in the CB) but it cannot decide how much credit the banks will expand, given that credit expansion depends on well capitalized banks, viable investment projects and creditworthy clients (these three things are in short supply now and this is the reason why we see that even if the monetary base is expanding we cannot see an increase in bank lending). So this is the account you want to analyze closely when your are looking for monetary expansion. Usually the ECB used to lend just for one day, one week or some months, but now, in December and February, it decided to lend longer term (3 years) because of the problems private banks had to refinance themselves in the market. The longer term loans and the decrease in the quality of the assets can, and probably will, be a problem for the ECB because if it wants to decrease the money supply or if the private banks will default on their loans, it will be more difficult to sell these assets and recover all or part of the loan (this is a big problem given the small capital base of the ECB, we will see that when we will analyze the liability side).

Other claims on euro area credit institutions denominated in euro (250,59): it is difficult to understand which are those other claims because the ECB does not specify more the content of this account. Probably the ECB puts here something that it does not want to specify. This is not pure conspiracy theory, the ECB itself told that it would not disclose some data to not induce panic in the market (smart guys, this declaration itself induces panic, doesn’t it?). Apparently in this account the ECB puts something called ELA (Emerging Liquidity Assistance). Under the ELA each European country’s central bank can lend to their private banks that have urgent liquidity needs and have not adequate assets to use as a collateral in order to ask for liquidity directly to the ECB. The ELA should be quite controversial because it allows central banks other than the ECB to create money supply without ECB’s direct control. This is justified saying that each country’s CB bears the risk of the private bank defaulting, i.e. the ECB does not bear any risk. However, if the central bank in question cannot repay the loan (a possible scenario), the ultimate credit risk is borne by the ECB (this means the risk is borne by other European countries, especially the sounder ones). Curiously this account increased by around 100 billions on the 20^th of April of 2012 and this increase was almost exactly offset by a decrease in the Other Assets account. I do not know the exact explanation for this movement.

Securities of euro area residents denominated in euro (605,11): this entry is split into two accounts: Securities held for monetary policy purposes (281) and Other securities (324). In the second account there are investments in not specified securities. The ECB does not specify what it puts in this account. The other one (Securities held for monetary policy purposes) is filled of PIIGS’ sovereign debt. When the market is turbulent the ECB buys directly in the secondary market Greek, Portuguese, Italian, Irish and Spanish sovereign debt and puts it in this account. The ECB does it in order to increase the market value of peripheral sovereign debt and decrease the interest rates at which these countries can refinance themselves in the market. As we told before this is not the only way the ECB can buy European sovereign bonds. Even if the ECB by mandate cannot buy directly sovereign bonds in the primary market (to reduce the incentive of monetization of debt), the ECB can buy this debt in the secondary market, or accept it as a collateral in private bank lending and indirectly refinance European states given that these private banks can take the money, buy sovereign bonds and then go to the ECB and rediscount them to get more money.

General government debt denominated in euro (30,58): in this account there is government debt of all European countries put there when the ECB was created, in order to capitalize it.

Other assets (257,82): this account is what here in Spain we would call “cajon de sastre”, that could be literally translated as Tailor’s booth and means a place where you put a lot of stuff without any order whatsoever. So I really do not know exactly what’s in it. The ECB’s guys say that it is in my own interest and for my safety that I do not know the content of this account. Do you believe that?

Total assets (3.002,59): Total assets are 3 trillion euros.

I hope that now it is clearer how and where to look in the ECB’s balance sheet. However, the most important thing is to look for changes in these accounts and understand what these changes mean. Let’s see how some of this accounts evolved during the last years.

 In this first graph we can see how the BS expanded from 2009 to 2012. It increased by 50%, so there has been a huge expansion of some or all the accounts of the BS. This is not good. It could lead to future inflation because there is more money and credit in circulation and people who did not receive this money first will experience an increase in prices without a correspondent increase in income. This is how citizens will pay for the present economic crisis, with the dilution of the purchasing power of money. We have not inflation right now because credit has been destroyed at a faster peace than money has been created (no “velocity” of money or money multiplier), however the increase in the monetary base could have inflationary effects in the future. Therefore, an increase in total assets is bad, not only for this reason but also because it can lead to a central bank default. However, not only the quantity matters, but also the quality.

If there is an increase in liquid assets it could be a good thing because the risk of loss is less probable. However the huge increase in assets can be explained by the increase in lending to euro area institution against worse and worse collateral and an increase in the purchase of peripheral countries’ sovereign debt. Therefore not only the quantity of the BS has increase but also the quality has decreased due to lending more money against worse collateral and buying distressed countries’ debt.

In this graph we can see how the ECB supported directly (in the secondary market) the peripheral countries buying their sovereign debt. Sovereign debt purchases were less than 50 billions till 2010. Then, with the Greek crisis and the “contagion” effect to other countries that were in a similar situation, the ECB tried to contain the increase in sovereign yields buying their bonds. Now this account’s value is around 280 billions. If comes out that this debt is worth just 50% of face value, the ECB should assume an impairment loss of 140 billions, more than its 85 billion euros of capital. Therefore, in this scenario, the ECB should declare bankruptcy or should be recapitalized by European governments (especially by Germany and the most creditworthy states).

I know that it is not a complete discussion of central bank’s balance sheet, but I think it can clarify a little bit how to read it.

In the next post we will analyze the liability side of the ECB’s balance sheet.

Italian Net Net (2): ELEN GROUP

Nets Nets in Italy 2: ELEN GROUP

The second Net Net I found in Italy is ELEN Group. Elen was founded in 1981 in Florence, Italy, from a university professor and one of his students. In 1983 the firm created its first medical laser system and in 1989 the company Deka Mela was founded for distributing biomedical devices in Italy and abroad and the group began taking shape. In 2000 the Group’s shares were listed on the stock exchange and in 2002 the Group acquired Cynosure, one of the most important American producer of medical laser devices. I found on ELEN website (www.elengroup.com) this description of the firm:

El.En. is the parent company of a high-tech industrial group operating in the opto-electronics sector, that exploits its own technology and multidisciplinary know-how to produce laser sources (gas, semiconductor, solid and liquid state) and innovative laser systems for medical and industrial applications.

The El.En. Group, one of the leading operators in Europe and the world in the laser market, designs, manufactures and markets at international level:

medical laser devices used in dermatology, surgery, cosmetics, physiotherapy, dentistry and gynaecology;

industrial laser systems for applications that range from the cutting, marking and welding of metals, wood, plastic and glass to the decoration of leather and fabric, and through to the conservative restoration of works of art;

systems for scientific applications and research.

Elen Group has a market cap of 50,6 millions as of 13/06/2012 and an EV of around minus 2 millions. Sales as of 31/12/2011 were 213,6 millions, total assets were 269,3 millions and shareholders equity was 175 millions (giving a P/B of 0,29). From balance sheet standards the group is cheap but from income statement standards it is not because the firm at the moment is not very profitable. The distribution of revenue is quite diversified. In 2011, 12,5% of Revenues came form Italy, 24% from Europe and 63% from the rest of the world.

Moreover, 63% of Revenue came from Medical Laser Systems while 17% came from Industrial Laser Systems.

The firm grew constantly its sales through organic growth and acquisitions but its operating profits have been quite volatile. Elen was never that profitable but before the economic crisis it had positive ROA and ROE and positive margins. I am not going to evaluate the earning power of this firm and its value as an operating entity, even if the earning power could add value to the assets if the group can digest its acquisitions and become profitable again. I found this firm during my screening for possible Nets Nets and therefore I will analyze the asset value. First of all lets take a look to the Net Net worksheet:

	Input	Per Share	Multiple	Discounted Value	Pert Share
Cash & Equivalents	48.364,54	10,03	100,00%	48.364,54	10,03
Restricted Cash	-	-	100,00%	-	-
Marketable Securities	24.332,28	5,04	100,00%	24.332,28	5,04
Cash Total	72.696,82	15,07	100,00%	72.696,82	15,07
Accounts Receivable	50.530,01	10,47	75,00%	37.897,50	7,86
Other Receivable	7.056,23	1,46	75,00%	5.292,17	1,10
Receivables	57.586,23	11,94	75,00%	43.189,67	8,95
Inventories Total	69.344,15	14,37	50,00%	34.672,07	7,19
Total Liabilities	94.285,50	19,54	100,00%	94.285,50	19,54
Property, Plant, and Equipment	27.807,09	5,76	10,00%	2.780,71	0,58
Shares Outstanding	4.824,37
Net Current Asset Value	105.341,70	21,84		56.273,07	11,66
NCAV + Fixed Assets (PP&E)	133.148,79	27,60		59.053,78	12,24
Net Cash	-21.588,68	-4,47
Price Per Share	10,50	10,50
NCAV + Fixed Assets (PP&E)	12,24	11,66
Price / NCAV + Fixed Assets (PP&E)	85,78%	90,02%

Elen has a Market Cap of 50,6 millions and 48,3 millions in cash: 95% of Market Cap supported by Cash. In addition to 48 millions in cash, the group has 24,3 millions of marketable securities (held by the controlled Cynosure) and total liabilities are 94 millions. The Net Current Asset Value is 11,66 against a stock price of 10,5 therefore price is 90% of net current asset value. If we add 10% of Net PP&E, NCAV becomes 12,24 and price would become 86% of NCAV. Hence the firm trades below NCAV and can be considered cheap form the balance sheet point of view. Moreover, the firm is losing money but it was profitable a few years ago and could become profitable again when the economy recovers from one of the deepest crisis of the century. Below I put a quick translation of the balance sheet:

Balance Sheet	31/12/11	Common size
Intangible assets	23.958.312,00	9%
Tangible assets	27.807.086,00	10%
Investments	442.129,00	0%
Deferred tax assets	6.354.281,00	2%
Other non current asstes	5.217.436,00	2%
Total non current assets	63.779.244,00	24%
Inventories	69.344.148,00	26%
Receivables	50.530.006,00	19%
Current tax assets	5.989.431,00	2%
Other receivables	7.056.225,00	3%
Short term investments	24.332.276,00	9%
Cash and Equivalents	48.364.542,00	18%
Total current asstes	205.616.628,00	76%
Total assets	269.395.872,00	100%
Shareholders Equity	175.110.377,00	65%
Non current liabilities	10.616.945,00	4%
Non current financial liab.	6.684.237,00	2%
Total non current liabilities	17.301.182,00	6%
Current financial liabilities	12.997.172,00	5%
Payables	34.576.491,00	13%
Other current liabilities	29.410.650,00	11%
Total current liabilities	76.984.313,00	29%
Total liabilities	94.285.495,00	35%
Total Equity and Liabilities	269.395.872,00	100%

Elen is well capitalized, 65% of the total assets is financed by equity. Financial liabilities are 7% of total assets while cash and short-term investments are 27% of TA. Inventories and receivables are quite high (45% of TA) but their level has been stable in the last years. Intangible assets are most of all goodwill generated by acquisitions and are not at a preoccupant level: 9% of TA. So the balance sheet is solid.

Conclusion

From the asset side ELEN group is undervalued given that it trades below the NCAV. However some risks exist: in the past managers (of the parent and of the subsidiary cynosure) have been prone to acquisitions and this could lead to a decrease in asset value brought about by vale destroying investments. Another risk is that the most probable catalyst for an increase in the share price is the return to profitability of the group and this depends on the performance of last acquisitions and the economic crisis. However, when the economy recovers, the medical laser sector, especially in esthetic applications, could be a growing one and this could add value to the asset value. Elen has almost 20% of the 1,7 billions € medical laser market and therefore it is in a good position to profit from the laser market resurgence.

Disclosure: I do not hold a position in any issue mentioned in this post.