Forum Archive Index - May 2001

["Peter Maiden" <pmaiden@xtra.co.nz>]

Ben - that was a really good article you linked us to.

 

Is truely frightening when Cisco report quarterly earnings of 3 cents a share and everybody is happy - but real losses are 37 cents a share or $2.69B

 

It is also a bit of a concern how more and more NZ companies are using EBITDA as the measure of profitability - especially those that have undertaken a series of acquisitions. Last year ADV got into trouble with their 'confusion' over EBITDA and real earnings (losses) . I note that RMG are stressing EBITDA now when in all probablity, due to high intangibles to be written off, they are trading at a loss.

 

What was reported in the Business Week article has been going on for years.  Author Peter Bernstein recently did a paper on corporate earnings in the USA over the last 15 years - and found that on the average 20% of earnings in any one year had vanished five years later due to write-offs etc

 

An excerpt from a review of his paper -

Peter Bernstein's analysis also takes a look at the quality of earnings. He compares year-on-year changes in operating earnings to write-offs and finds that "write-offs tend to deepen in years when earnings growth slows down or goes negative". Conversely, write-offs decline in years when earnings growth is more vigorous. Bernstein explains that "this correlation does suggest that managements are more inclined to disclose the consequences of bad decisions when things are rotten anyway, rather than divulging these unhappy facts when they are originally discovered. Making lousy earnings look even worse is likely to do less damage to a stock whose price is probably already depressed than the damage an elevated stock price could suffer when a potentially good earnings report is spoiled with a dose of bad news."

Bernstein further comments that write-offs seldom relate to recent decisions, but are usually "the consequence of unfortunate moves taken some time in the past". When he analysed each year's write-offs as a percentage of reported earnings five years earlier, he found that "over this fifteen-year time span, an average of 20% of reported earnings in any one year vanished five years later due to write-offs; the figure exceeded 30% on three occasions" (emphasis in original).

Bernstein concludes that it is therefore questionable how much confidence we can have in reported earnings and in reports of how well these companies are doing at any particular time. He also finds that the probabilities do not favour an extension of the impressive earnings gains of the last few years into the next few years despite the breathtaking pace of technological changes.

Pretty scary stuff - and there is eveidence that the same thing happens with many NZ corporations.

Cheers

Peter