Balance sheet expert about Signa: “They have overvalued their assets”

Mr. Schmolcke, you have written a book about balance sheets. Right at the beginning you explain that balance sheets are sexy. A very exclusive opinion. How do you come to this?
Yes, the discipline has a reputation for being dry and boring. This is certainly due to their self-portrayal. But actually, annual financial statements are like a complex, exciting series that only releases one episode a year. Only in fast motion, i.e. several completions in a row, does the story become really interesting.

Anyway, if you understand the endings…
That is my mission. I have prepared balance sheets in responsible positions for over 20 years, sometimes with almost physical effort. But often they didn’t even read their own employees. And in the training courses that I have been giving for years, I have noticed again and again: Even supervisory board members, lawyers and managers often do not know how to read a balance sheet correctly. This is a shame because there is so much valuable information hidden in it.

Why is it that even supervisory boards and managers cannot read balance sheets?
The funny thing is: everyone thinks everyone else can do it. In fact, there is no training in which you can really learn how to analyze a financial statement. I still remember to this day how disappointed I was in my business studies.

The example of Wirecard shows that many investors hardly understand balance sheets or don’t even look at them. The share price hardly fell until shortly before the bankruptcy, although indications could have been found in the balance sheet. At least that’s what you write in the book…
With every major bankruptcy, I look at the balance sheets and ask myself whether I would have recognized it beforehand. I was really annoyed at Wirecard because it was so obvious. At the end of the year, Wirecard regularly had more money in its cash register than it made in sales. A pattern emerged. When I introduce this, people’s mouths always drop open. I experience this effect again and again, where you look at the degree and think that it doesn’t exist.

Is that why you can’t let go of balance sheets?
Once you start reading balance sheets according to a certain pattern, like the one I prepare in the book, you suddenly see things that make you think: How can something like this happen in public? Everyone can read it, but no one notices it. That fascinates me.

You often use the Wirecard case as an example in your book. What can you learn about balance sheet analysis from this?
The first point is publishing speed. Wirecard was in the DAX, where it usually takes around 60 days for the auditor to sign off on the financial statements. According to the German Corporate Governance Code, a good value is 90 days. Wirecard needed 101 and 114 days for its last transactions. This happens in the best families, but they have to explain accordingly why it took so long. Here you can then – this is the second point – look at the tongue-lashing: How does the board comment on this?

How was it at Wirecard?
They said: According to the law we have 120 days, and we stuck to that. That’s true, of course, but it’s neither a good standard nor does it seem particularly likeable.

You talk about this particular tongue strike often in your book. How do I know whether there really is a clue behind it or whether it is simply worded in a complicated way?
Of course, the more you read balance sheets, the more practiced you become. Basically, a good explanation should always be short and understandable. If it is complicated, you can question whether that is okay. If you feel this way about several components in a balance sheet and perhaps a pattern becomes apparent, you already have a feeling for how likeable the company is.

Is reading balance sheets about feelings and sympathy?
In my opinion, feelings make up at least half of the personal assessment. The law requires companies to make these declarations so that everyone can form an opinion. It is intended that this is based on a linguistic statement from the board. As a reader, you can therefore feel inside yourself and ask yourself: What do I think about the fact that the company publishes its financial statements so late? Would I invest my retirement savings with this company? Your assessment may be subjective or incorrect, but you have developed an informed opinion.

When I take stock, I pay attention to my own feelings and first look at the time of publication.
The very first question is always: Is there even a balance sheet? And if not, why not? Then check the timing. I think this is so important because the speed of completion says something about the company’s process control, i.e. how well a company is organized. This historically comes from the Anglo-Saxon markets, where it is directly relevant to the price. Once you have formed your impression based on the publication and the statements made by the board, take the third part of the numbers.

At Wirecard, the auditors found the financial statements to be good. Why didn’t she recognize the clues you gave?
Of course I wasn’t there, but the examiners were clearly professionally deceived. On the other hand, they could have worked more precisely, as the final report from the auditor supervisory authority APAS shows. The question is therefore not easy to answer. The aim of the audit is to sign financial statements free of significant errors. The work is incredibly complex, especially for global companies. Every number and every corresponding document must be checked. But auditors are not prosecutors or the police. If you present them with well-prepared evidence and processes, you can massively deceive even a critical audit. Anyone who has ever been scammed can confirm that scammers are nice people and that’s why you fall for them.

The APAS ruled in December that EY had breached its professional due diligence obligations at Wirecard.
The entire auditing system is based on various institutions auditing each other. When the APAS comes to an assessment, it does so on the basis of rigorously verifiable evidence. Therefore I can agree with this assessment.

Signa published financial statements late

Have you ever been cheated on?
Yes, I was just new as managing director. Someone got an operational loan, everything looked good. But then the company went bankrupt. An airline has even bilked the bill for over a million US dollars. The Air Luxor simply flew away after a major repair and our bill was never paid. At one point we sent people to the airline’s Portuguese office only to find that there was no one there anymore. If I had done an analysis in these two cases, as I routinely do today, this would not have happened.

In addition to Wirecard, you also often cite the VW diesel scandal as an example in your book. Is there currently a company whose balance sheets you are particularly interested in?
I look at every major bankruptcy. Recently, Signa from Austria was very prominent in the media. When you look at the Austrian commercial register, where the financial statements can be found, you immediately notice the publication date: some of the last financial statements were published several years late. But what’s really interesting is that you can’t find a financial statement for the entire group anywhere. There are only one subgroup financial statement for the subsidiary Signa Prime Selection. It says – after a bit of searching – that the parent company Signa exercises “significant influence” on Signa Prime. This is where things get really tricky.

And what do the numbers reveal?
I see that the loan liabilities total 6.7 billion euros. The profit and loss statement also shows sales of 438 million euros and a profit of 732 million euros in 2021 – they have overvalued their assets. With this knowledge and the fact that there aren’t even overall consolidated financial statements, would you have given them even a single euro? Anyone can ask themselves that.

Is your book ultimately also about psychology?
In the subtext, yes. But above all it is about the use of publicly available information sources. All the things we talked about can be found out in ten minutes and I hope I get more people to just look at balance sheets.

This article appeared firstwhich, like stern, is part of RTL Deutschland.