The Money Illusion: Petron Corp Edition

Last weekend I wrote about the Money Illusion:

Under an inflationary environment numbers are deceiving. Let us say entity X produces 100,000 units a year priced at 10 currency units each. Let’s say the currency unit is the Philippine peso. This extrapolates to an annual Peso output of 1,000,000.

Let us say due to inflation, prices per unit increased by 10% or Php 11. Let us further assume the output remains fixed. At the end of the year, Peso output will be valued at Php 1,100,000. So there will be growth in Peso value transactions but not in the actual output.

And even if output declines, for as long as the decline will not be equal or be more than the inflation rates, the numbers will reveal “growth”. You can apply this to a firm, an industry, or a nation.

This is called the “Money Illusion” where people tend to see and think in nominal terms rather than in real term

I came across San Miguel’s Corporation’s 1H 2014 Investor’s Briefing and found Petron’s top line as a seeming example.

Petron Corp’s data reveals of an impressive 18% jump in net sales in 1H 2014. Net sales  represents total revenue, less the cost of sales, returns, allowances, and discounts.

Sales of Petroleum and other related products (gasoline, diesel and Kerosene) comprises the almost the firm’s entire sales (as reference I used Petron’s annual report 2013 p 69, p. 171).

On the other hand, the volume represents the aggregate number of goods sold which grew by only 8% (Petron 2013 annual cost of goods p 139, p 120)

The difference of 10% (18% minus 8%) appears to have emerged from price changes of the goods sold over the said period. This implies revenue gains from PRICE INFLATION!

The BSP’s wholesale price index seems to validate this. I used the wholesale price index because Petron sells through distributors (resellers) and or through retail outlets.

Crude Materials Inedible except fuel spiked 28% for the first 5 months of the year vis-à-vis 2013. Meanwhile mineral, lubricants & Related Materials jumped by 4.05% over the same period. So much of Petron's top line growth must have reflected a combination of the above.

The bottom line is that whatever profits generated by Petron in 1H 2014 substantially stems the Money Illusion than from real economic activities. 

This also serves as an example how inflationism temporarily boosts revenues, earnings and profits.