Business Environment

Credit economy where intangible values such as brand power and credit are valued

2017/12/29

ブランド力や信用などの無形の価値が評価される信用経済

An index that measures the return, efficiency and safety of an investment in visible capital.

In Indonesia, urban development, cluster development and apartment building by Summarecon and APLN (Agung Podomoro) groups, led by the Meikarta project in Cikarang by the Lippo Group, are progressing, and every time I pass by a real estate sales booth in a shopping mall on the weekend, I am asked for my mobile phone number after being briefed on the properties and price list, so I frequently get sales messages from real estate salesmen on WhatsApp on my smartphone.

In the case of an apartment or villa as an investment property, the term ROI (Return Of Investment = Return On Investment) is always listed in the brochure, and it is literally an indicator of how much revenue (net income) is expected to be earned on the amount of money invested (capital + debt).

For example, if you buy a property in 1 Milyar with 100 juta of cash on hand and 900 juta of bank loans using KPA (Kredit Pemilikan Apartemen Apartment Loan) or KPR (Kredit Pemilikan Rumah Housing Loan), and you can rent it for 100 juta every year, the ROI will be 10%, so you can say it is an investment with a high enough return on investment.

However, if 90% of your investment is covered by debt as in this example, there is a large risk of delays in payments if you lose your job or your business goes out of business. Because the standard of safety is missing from ROI, there is an index called ROE (Return Of Equity), which indicates how much profit is expected on the investment amount (own funds) excluding debt.

  • ROE = net benefit/own capital for the period
    = [current net profit/high seller] x [high seller/assets] x [assets/own capital]

In other words, ROE is a measure of the balance between "profitability x efficiency x safety".

The flow of off-balance sheet elements into the three financial tables

There are three main ways to raise assets: borrowing from banks, selling shares to raise funds from people who can evaluate the future of your company and expect capital gains, or retaining them as retained earnings, which is the accumulation of profits generated from sales activities.

  1. Raised as a loan from a bank
  2. Raising funds from shareholders
  3. Retained earnings as an accumulation of operating income

The legal capital is the amount of capital that is determined at the time of establishment of the company and is stated in SK (Surat Kepetusan) Kehakiman (decision letter from the Ministry of Justice) that is required to be obtained by reporting to Kementerian Hukum (Ministry of Justice), however, in Indonesia, 20% of the legal capital must be added to the net assets in B/S (Balance Sheet) as capital reserve.

Legal reserve is money pooled from retained earnings with net income as a source to be returned to dividends, and capital reserve is money raised from non-operating activities such as shareholders' equity and stock issuance. However, the basic distinction is made between "profit" items and "equity" items that are unrelated to management raised from shareholders.

Expenses and revenues incurred in operating activities are reported on the P/L, but on the accrual date on a basic accrual basis, so payments and receipts occur 30 or 60 days after the accrual date, so a cash flow statement (C/F) is prepared to make sure that you have the cash and deposits you need when you need them.

The flow of the three financial tables, in which net income in P/L is slid into the net assets column in B/S, and gains and losses on P/L based on accrual basis are reclassified to cash basis, is an on-balance sheet view of tangible assets supporting specific operating activities and their breakdown. In the current flow of mark-to-market basis based on IFRS (International Financial Reporting Standards), the emphasis is on the on-balance sheet view of off-balance sheet elements that place more emphasis on market value.

Why the credit economy (valuation economy) is in the spotlight

In July 2017, Youtuber Hikaru's sell-out incident brought him into the limelight, and he was forced to suspend his activities indefinitely because of his stock price manipulation and his mishandling of the closing price.

Indicators for measuring corporate value include return on equity (ROE), which is the above-mentioned return on shareholders' equity, and price book-value ratio (PBR), which is the market value of profits.

  • PBR = Total Current Value / Own Capital
    = [Total current value/net profit for the period] x [Net profit for the period/ own capital]

Under the IFRS market valuation principle, total market valuation as measured by stock prices is made on-balance sheet, but invisible intangible assets such as brand power, creditworthiness, and know-how still exist off-balance sheet, and the movement to put them on the market economy is the token at the time of VALU and ICO (Initial Coin Offering) mentioned above.