This is an important reminder that “adjusted earnings” are only as useful as the adjustments behind them.
A change in classification can materially change the earnings base, margins, and ultimately the valuation investors are willing to assign to the business.
The headline number matters less than understanding what sits underneath it.
I agree, and the important figure in this case is the interest cover rather than the margin. The management state that it is 5.3 times; however, if we treat impairments as a cost then the figure falls to 2.6 times. While the first figure is satisfactory, the second is near the level at which lenders begin to impose covenants. Therefore, the way in which we classify these items has an impact not only on the valuation but also on the amount of money the company can borrow.
The test that we ought to apply is one that goes beyond simply looking at the adjustments. We need to consider whether the business model really requires the item to be put back in. When a lender holds the loans, credit losses are by no means uncommon – they form part of the cost of goods sold.
This is an important reminder that “adjusted earnings” are only as useful as the adjustments behind them.
A change in classification can materially change the earnings base, margins, and ultimately the valuation investors are willing to assign to the business.
The headline number matters less than understanding what sits underneath it.
I agree, and the important figure in this case is the interest cover rather than the margin. The management state that it is 5.3 times; however, if we treat impairments as a cost then the figure falls to 2.6 times. While the first figure is satisfactory, the second is near the level at which lenders begin to impose covenants. Therefore, the way in which we classify these items has an impact not only on the valuation but also on the amount of money the company can borrow.
The test that we ought to apply is one that goes beyond simply looking at the adjustments. We need to consider whether the business model really requires the item to be put back in. When a lender holds the loans, credit losses are by no means uncommon – they form part of the cost of goods sold.