No Pain, No Gain: More means less when it comes to profit and loss
Saturday 18 April 2009
Company accounts have become far too complicated. It is not surprising that many small shareholders are confused by the deluge of often irrelevant figures that are now required under accountancy regulations. But it is not only the occasional investor who is baffled. From what I hear professionals are frequently bewildered by the array of figures now routinely presented.
The new-fangled rules may have been conceived in a spirit of reform. They are, however, yet another example of Hutber's Law improvement means deterioration. Why use one figure when a dozen are available seems to be the latest command. Far from making accounts easier to follow the additional details make them even more difficult to decipher. It is a question, for example, of take your pick as far as profit (or loss) figures are concerned. In my younger days pre-tax and net were the two relevant declarations. Now the all-embracing profits range includes adjusted, basic, gross, operating and statutory, as well as a variety of sub-headings. There is also the infamous EBITDA earnings before interest, tax, depreciation and amortisation (plus possibly non-recurring items and other bits and pieces). The two old stalwarts, pre-tax and net, are still obligatory.
It may seem strange to criticise too much information. But I believe much of the arcane detail now trundled out is of little value. Many will say that the information deluge should help expose the rubbish. Not so. The rigmarole merely makes company accounts much thicker than a few years ago. As the accountant Malcolm Howard, in a recent letter to The Independent, pointed out "fantasy accounting" now rules. It has all become a silly game. Common sense is needed.
Last month I complained that a sharp decline in the shares of Mears, a constituent of the "No Pain, No Gain" portfolio, could partly be explained by confusion over the successful group's figures. Another portfolio member recently produced a breathtakingly detailed set of figures. The year's results of Lighthouse were bitterly disappointing, even with six profit/loss figures offered. Before a rash of charges a profit of 553,000 was achieved. But once extraordinary items were taken into account (including a 7.6m impairment charge) the group, a financial adviser that embraces a significant wealth management division, was no less than 8.5m in the red against a 1.9m profit last time. The non-cash impairment costs related largely to the suspected decline in the value of an acquisition. Not surprisingly there is no dividend although an 0.2p a share interim is promised.
Still, Lighthouse is sitting on 12.3m cash which is not far removed from its stock market valuation. The group is in for a tough year. Costs have been cut but researcher Equity Development is looking for profits of only 300,000.
Three other constituents have been active. Private & Commercial Finance and Printing.com have disclosed that last year's profits should be in line with stock market expectations. PCF, a business and consumer hire purchase group, is, therefore, set to produce a figure of around 850,000. Printing.com, with its Manchester printing hub and network of retail outlets, should make some 2.1m. Jon Lienard at stockbroker Brewin Dolphin has, however, reduced his dividend expectations. He is now looking for an unchanged 3p-a-share year's payment, producing a 10 per cent yield. For this year he has cut from 4p to 3p.
Finally Wyatt or as it has been renamed, Green CO2. The online employment benefits business, has completed the transformational acquisitions of companies involved in energy performance certificates and home information packs. But it cannot be claimed that the enlarged group got off to a flying start. It failed to raise all the cash it wanted. The share placing produced the expected 517,000 but the open offer raised a mere 44,000 with a miserable 12.6 per cent take up. The company had hoped the two exercises would pull in nearly 900,000.
So Green CO2 may have to eventually seek a further cash injection. I am not surprised so few responded to the open offer. Battered and bruised shareholders remain exceedingly cautious when it comes to investing in what they regard as speculative smallcaps. The portfolio was unable to subscribe. Each investment is restricted to 5,000. Consequently it cannot become involved in a cash-raising exercise.
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