Noble Group: trading glances

Stare hard at something long enough: lines begin to blur and shapes change. Analysts have looked intently at the accounts of Singapore-listed Noble Group for months and its profits look, well, fuzzy. The commodity trader has struggled to convince the market that all is well. Its shares have fallen by about a quarter this year alone.

Noble buys commodities and sells them to end-users, taking a spread in the process. All perfectly honourable. It prefers a capital-light business model, meaning that it does not own mines or farms. That also means that it relies even more heavily on working capital for its transactions. Noble currently has an investment grade credit rating, important to keep financing costs low (and counterparties sweet). As long as the rating agencies have faith in Noble's financial health, that rating is safe.

Research houses specialising in sell recommendations fully understand this need. These naysayers claim that Noble has used some aggressive accounting techniques. For example, Noble uses different purchase and sale agreements, over different time periods, in its trading business. Accounting rules demand that the company regularly determine the fair value of these contracts - given fluctuating commodity prices. The sum of the fair values, which depend on assumptions made by management, affect the balance sheet. UBS notes that between 2010 and 2014, fair value as a proportion of shareholders' equity rose to 90 per cent, up 10 times.

Noble argues that it tests all of the assumptions behinds its balance sheet values. S&P believes the company deserves its credit rating - though it would like to know more about the assumptions. Noble spends a lot of time explaining itself these days. It has renewed a $2.2bn credit line with its bankers.

Looks can deceive. As long as Noble maintains its ratings and financing, it should survive this assault on its reputation. But without those it is lost. Clarity is virtuous.

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