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8k Miles Software Services Limited

Essay by   •  December 5, 2018  •  Business Plan  •  1,226 Words (5 Pages)  •  26 Views

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8K Miles

8K Miles Software Services Limited (8K Miles), a global Cloud and security solutions provider and Next Generation Cloud Managed Services Provider. It comes under the SMAC (Social, Mobile, Analytics, Cloud) domain of business and provides its customers with customised solutions. A self-described technology company, they are one of the biggest players in the security and cloud transformation domain particularly effective in using big Data, Artificial Intelligence, Machine Learning, IoT etc. In Sep 2018 an auditor of 8K Miles Media Private Ltd., whose directors are promoters of 8K Miles Software Services Ltd, quit alleging that the company forged his signatures on bank investment certificates to transfer money abroad. The alleged forgery was done in nine overseas direct investment certificates submitted by 8K Miles Media to Indian Bank Ltd.’s Porur Branch for transferring a total of $7.15 million to the company’s unit in New Jersey. The nine transactions were done between June 21, 2017, and March 28, 2018, according to information in the resignation letter. This was one step in the long list of issues which have been plaguing 8K Miles since the start of the year, with its stock price already down 75% YTD. Following the outbreak of this news CFO of 8K Miles Software resigned till all the allegations against him and the other promoters were not cleared. This news was followed by another set of allegations which claimed the promoters were trying to sell their stake in the company illegally.

Auditor’s report – Observations

As explained one of the auditors of 8K Miles’ related company had quit explaining foregery on the account of the promoters. Considering the events of the happenings post the publishing of the Annual Report of FY18, the main auditor’s report ie Deloitte didn’t mention any fishy knowledge about the company. The report contained standard dsclousres about the supposed findings and doesn’t seem to warn the investors about any potential red flags in the company. It thus throws a doubtful picture over its authenticity.

Tests – Forensic Analysis

The following tests were conducted and observations were recorded in a bid to analyse the legitimacy of the numbers reported by Vakrangee as a company in its books.

  • De Angelo’s Test:

De Angelo Test

Mar-18

Mar-17

Mar-16

Mar-15

Total accruals (Net income - CFO)

46.6

32.2

20.6

-7.0

Assets

818.9

509.2

314.3

151.9

De Angelo Test

0.03

0.04

0.18

 

Higher the discretionary accruals, higher chances of manipulation. To find out discretionary accruals, you need to first find out total accruals. These total accruals are further regressed with respect to the assets of previous year to find out discretionary accruals. De angelos coefficient tests the amount of accruals realized this year, driven by the asset base of the previous years. The number being as small as possible indicates a smooth increase in accruals (net income – cash flows) YoY relative to the change in assets.

The De Angelo coefficient comes out to be reasonably low, and doesn’t indicate any spurious increase in accruals realized by the company from dubious increases in its asset base.

  • Quality of revenue:

Quality of Revenue

Mar-18

Mar-17

Mar-16

Mar-15

Cash collected

596.7

404.9

191.7

 

Net sales

849.2

534.4

271.9

 

Quality of revenue (%)

70%

76%

71%

 

 

The company as is evident by the numbers, had outstanding receivables from its revenue shown every calendar year to the tune of ~30%. The quality of revenue should be close to 100%, but the IT industry in general, being client driven has revenue being recognized once contracts are penned with clients and cash being collected at regular stages of delivery and completion of committed assignments. But as seen here Quality of Revenue has deteriorated in the last 3 years clearly showing a Red Flag 

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