The recent stock rally of food company Marfrig (Bovespa: MRFG3) can be based on a mistaken assumption of improved operating performance, research firm Empiricus wrote in an open letter this Monday. The company’s stock rallied almost 50% in the last two weeks.

The text of Empiricus shows a series of accounting inconsistencies with the IFRS (International Financial Reporting Standards). Generally, we found that some important (and even trivial) IFRS requirements were thrown under the rug by the company,” explains Empiricus. In addition, the research firm notes that awkward gaps” were found in the balance sheet, resulting in errors of R$45 million in 2009 and R$1 billion in 2010.

Questionable improvements

The company reported a Q3 net loss 687.2% higher to the same period in 2010. The result, however, is compensated by a much better operating performance, which was the item that surprised investors positively. 

The research firm also points out that the EBITDA margin of 11.5% is more like 7.8% if
“other operating income / expenses were to be excluded, considering this item is not clear and do not seem to comply with IFRS.


Empiricus Research suggests that Marfrig adjust the IFRS errors and resubmit the statements of 2008 and 2009. If this is done, they claim the 2008 EBITDA would be adjusted down from R$844 million to R$490 million reais (a 7.9% margin), and the 2009 EBITDA would drop from R$819 million to R$267 million (a 2.7% margin). The result of these adjustments will affect the leverage indicators by huge amounts. For instance, the net debt / EBITDA of 3.7x in 2008 would translate into 6.6x. For 2009, it would increase from 2.6x to 7.9x. (we have already discussed the company’s debt here)

 “The adjustments in leverage ratios and cash flow numbers can impact the company’s reputation with the market and, ultimately, its solvency,” says Empiricus.On October 19, the rating agency S&P; has revised to negative from stable the rating outlook of the company.

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