Accounting skulduggery hides $26b in losses,
The article mixes together a few things, but I was struck by this graph from KPMG showing the profit patterns over the last eight years for Australia's top 50 listed companies. The numbers on the right hand side of the graph relate to revenue, on the left profits.
The graph suggests (I am just working from the visuals) that reported revenues have gone up by around 50 per cent. During that same eight year period, statutory profit before tax (the profit of the business after write-downs and charges) after rising sharply have trended down and are now lower in money terms than eight years' ago. Underlying profits have been trending down, but at a much slower rate and are still higher than they were eight years ago, leading to a growing gap between underlying earnings and statutory earnings.
Some measure of asset write-down is perfectly normal. Businesses make investment decisions. Some go wrong, some go right for a period and then go wrong. The most recent impairments reflect, at least in part, the end of the mining boom and consequent write-downs. However, the growing gap between underlying earnings and statutory earnings is a worry as is the poor performance of statutory earnings.
Both sets of measurement are subject to manipulation. New CEOs, for example, often seem to write of as much as they can in their first year to boost later performance in statutory earnings. Both businesses and investors focus on underlying earnings because they are meant to provide the best measure of the core strength of the business. We have had to make this financial write-off, but the underlying business is doing well. This creates an incentive to manipulate underlying earnings.
Accepting that both measures are subject to a degree of manipulation, the decline in both profitability measures relative to revenue is reasonably striking. Statutory earnings this financial year are likely to pick up because impairments will be less, narrowing the gap between the two measures, but I don't think that that will affect the overall trend unless underlying earnings increase.
The graph suggests (I am just working from the visuals) that reported revenues have gone up by around 50 per cent. During that same eight year period, statutory profit before tax (the profit of the business after write-downs and charges) after rising sharply have trended down and are now lower in money terms than eight years' ago. Underlying profits have been trending down, but at a much slower rate and are still higher than they were eight years ago, leading to a growing gap between underlying earnings and statutory earnings.
Some measure of asset write-down is perfectly normal. Businesses make investment decisions. Some go wrong, some go right for a period and then go wrong. The most recent impairments reflect, at least in part, the end of the mining boom and consequent write-downs. However, the growing gap between underlying earnings and statutory earnings is a worry as is the poor performance of statutory earnings.
Both sets of measurement are subject to manipulation. New CEOs, for example, often seem to write of as much as they can in their first year to boost later performance in statutory earnings. Both businesses and investors focus on underlying earnings because they are meant to provide the best measure of the core strength of the business. We have had to make this financial write-off, but the underlying business is doing well. This creates an incentive to manipulate underlying earnings.
Accepting that both measures are subject to a degree of manipulation, the decline in both profitability measures relative to revenue is reasonably striking. Statutory earnings this financial year are likely to pick up because impairments will be less, narrowing the gap between the two measures, but I don't think that that will affect the overall trend unless underlying earnings increase.
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