Generation Capital published its second-quarter report. The ratios in it do not look like a company's accounts, and that is because it is not an operating company.
Errors or inaccuracies are possible. Spotted something that looks wrong? Write to me and I will correct it.
The Quarter
| NIS millions | The quarter | Share of the top line |
|---|---|---|
| Top line | 870.5 | |
| Operating profit | 853.1 | 98.0% |
| Pre-tax profit | 826.2 | 94.9% |
| Net profit | 636.4 | 73.1% |
| Basic earnings per share | NIS 0.35 | |
| Balance sheet total | 6,910.9 | |
| Equity | 4,937.6 |
The gross profit line does not appear in the structured filing, and is therefore not presented here.
Why 98% Is Not Possible - and What That Means
Between the top line and operating profit, only NIS 17.5 million was taken out, of NIS 870.5 million.
And this matters for reading the report, because that ratio does not exist in businesses.
In an operating business, cost of sales and operating expenses stand between revenue and operating profit. At Yochananof they swallowed 93% of revenue; at G City, a property company, about 28%. 98% remaining is not a business selling something.
Generation Capital is a listed infrastructure and energy fund. It does not operate power stations or transit lines - it holds stakes in them.
So its top line is not sales. It is largely the results of its investments - its share of the held assets' earnings and changes in their value. And when the top line is already a net result, there is not much to deduct from it.
The practical conclusion: this fund's margins must not be compared to an operating company's. They measure entirely different things, even though the labels in the accounts look identical.
The Figure That Is Comparable: Return on Equity
Net profit of NIS 636.4 million on equity of NIS 4,937.6 million - about 12.9% in the quarter.
And that is the number you can place alongside other companies, because it asks the same question in every case: how much was generated on each shekel of capital.
And I deliberately do not multiply it by four. At a fund whose result derives from asset revaluations and from the earnings of held companies, one quarter is not an annual run rate - it is one point in a series that can move in both directions.
And the Balance Sheet: Unusually Low Leverage
| Balance sheet total | NIS 6,910.9 million |
| Equity | NIS 4,937.6 million |
| Leverage ratio | 1.4 to one |
And that is an unusual ratio in this sector, in the favourable direction.
For comparison, from the same day's filings: Nofar Energy stands at 4.8, Doral at 3.0, and Shikun & Binui at 3.7.
And the explanation is structural: the fund holds stakes in projects, and the debt is generally carried by the projects themselves rather than by it. The debt exists - it simply sits one layer down, not on its balance sheet.
And that shows clearly in the line below the operating line: only NIS 26.9 million was taken out there, 3.1% of operating profit - against 121.9% at Nofar.
So a low leverage ratio at a holding fund does not mean there is no debt. It means the debt is not at the fund.
And the Tax
NIS 826.2 million before tax and NIS 636.4 million after - that is, NIS 189.7 million of tax, an effective rate of 23.0%.
Almost exactly Israel's corporate rate.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
This report is a good reminder that a label in the accounts does not guarantee its content.
"Revenue", "gross profit", "operating profit" - these are names of lines in a standard, not names of economic phenomena. On the same day I read a supermarket chain's accounts where expenses swallowed 93% of the top line, and accounts where 98% remained. Both are entirely proper.
And the practical rule I take is this: when a margin looks impossible, the problem is not the company - it is my assumption about what the figure measures. A 98% operating margin is not a sign of a phenomenal business; it is a sign that the top line is not sales.
And what can be assessed here is the return on equity, about 12.9% in the quarter, and leverage of 1.4 that leaves room to manoeuvre. Those are two figures that mean something outside their context too.
And what I would look for in the full accounts is the breakdown of holdings and the source of the result - how much of the profit is actual distributions from the assets, and how much is their revaluation. The difference between the two is the difference between cash and an entry.
(It is important to stress: this is my personal opinion only, and nothing herein constitutes a recommendation to take any action.)
