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Creative Accounting!!

Posted by Larry Doyle on March 27, 2009 5:23 PM |

I will readily admit that my preferred source for market news is Bloomberg.  Having seen enough media outlets covering market activity, in my opinion, there really is no alternative to Bloomberg. Why? Literally every day I am learning and being introduced to new and useful information. The information emanates not only from those they interview, but often from their own in-house research and analysts.

To wit, I just caught a segment with Jonathan Weil, a Bloomberg reporter focused on corporate accounting. With 1st quarter earnings a few weeks away, Weil’s insights are the stuff that stops you in your tracks. 

In short, Weil highlights how companies effectively massage their earnings and income statements. Massage? Where’s Sarbanes-Oxley when you really need it to check the numbers?  

The critical statistic used to measure the relative value of the S&P 500 is the Price/Earnings ratio. Weil truly distinguishes himself by exposing the fact that real earnings are non-existent.  He writes about earnings:

The earnings gauge I’m referring to is called comprehensive income. While there’s a good chance you have never heard of this before, it’s a far more inclusive measure of profitability than the better-known subset, net income. The term also has a well-defined, standardized meaning under the accounting rules.

Comprehensive income is the change in a company’s shareholder equity during a given period, excluding the effects of new capital injections and dividend payments. By this measure, S&P 500 companies had combined losses in the past four quarters of about $200 billion, according to data compiled by Bloomberg and my own review of the companies’ financial reports. In other words, there is no P/E ratio, because there is no E.

By contrast, S&P 500 companies had about $295 billion of combined net income during the same period, which translates into a P/E ratio of about 25 times earnings for the index. That’s not cheap, by historical standards. And it’s a lot to pay for Botox earnings that are unnaturally stiff and cosmetically enhanced.

While I know that manufactured beauty has become a big business in this country, I much prefer the natural beauty of my wife and a truly robust earnings and income statement.

If Weil’s analysis has stopped you like it did me, read Botox Earnings Put Crooked E in Stock Market P/E .

LD

  • fiscalliberal

    Pretty interesting article in WSJ:

    http://online.wsj.com/article/SB123819407230161181.html

    about OTS allowing the banks to cook the books by backdating capital infusions. I think digging like this might send some regulators to jail.

    The Politically Correct term for this is “Financial Innovation”.

  • Larry Doyle

    I believe you initially highlighted the corrupt behavior of this regulator. Now why do you think he allowed this to happen? Perhaps a little payola?

    Given the enormous size of embedded losses in a number of companies and industries, accounting shenanigans will continue? When the upside is the future of your job and potentially your company and the downside is the potential loss of job, an unknown penalty/fine, or company suffering, lots of people will choose the former.

    The price of doing that needs to be elevated!!






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