By DAVID MOON, Moon Capital
September 22, 2002
It is almost as if the technology bubble never burst. Two years ago,
investors berated themselves for blindly accepting the pabulum distributed by
company executives who were eager to focus Wall Street attention on anything
other than their earnings and balance sheets. Sadly, many of those
companies are back at it. Bragging about things like "pro forma cash
flow," "net adjusted adjusted cash" and EBITDA ("earnings before interest,
taxes, depreciation and amortization"), companies are once again looking for (or
creating) an accounting metric that makes their situation appear favorable - or,
at least, less unfavorable.
IPIX or Amazon.com can brag about expecting to post positive EBITDA some day
in the future. Real estate investment trusts often tout their FFO (funds
from operations) ' a term that has no standard, generally accepted
definition. Why shouldn't other companies also use creative accounting to
measure their own performance? Here are a few new accounting measures I
have created that some companies might consider:
Many companies might consider reporting "Earnings before CEO
freebies." This would exclude irrelevant perks like corporate aircraft and
free loans. General Electric, which is paying for monthly flowers at the
company provided apartment of former CEO Jack Welch, might also consider a
variation on this measure, EBFCF, "Earnings before former CEO freebies."
Companies with significant payroll might consider reporting "Earnings
before compensation expense." Wait a minute; a bunch of them already
do. All they have to do is pay their employees with stock options and the
expense never shows on the income statement.
With the demise of Internet stocks and the saturation of Internet
access, the Time Warner unit of AOL Time Warner should consider reporting
"Earnings before the losses of our parent company." This would allow
issuing a positive press release, perhaps buoying the AOL stock price.
In a period of economic contraction, many companies might find it
useful to show their investors "Earnings before our business slowdown."
(Or, in some industries, 'Earnings before our business sucked.') This
number would depict the amount of earnings the company would have reported (or
might have reported) had business not slowed.
Retail stores who rely on their seasonal forecast of consumer
preferences, often try to report 'Earnings before inventory markdowns.'
Companies such as WorldCom, Enron, Adelphia and others could show a
much healthier income statement if they would report "Earnings before government
fines and penalties." The accounting profession would have to determine if
legal fees incurred on behalf on corporate executives actually serving in a
penitentiary would be excludable from this number.
When a company makes a bad acquisition and later is forced to write
down the value of certain assets, they might consider reporting "Earnings before
charges for stupid acquisitions." Hewlett Packard's acquisition of Compaq
would fit into this category.
Any company with limited revenues and exorbitant expenses should
consider reporting "Earnings before ALL expenses." This would guarantee a
positive earnings report for almost any company.
Even companies with limited expenses need a method to 'spin'
their value ' particularly if the business also has limited revenue
growth. These businesses might benefit from reporting 'Earnings assuming
we sold a bunch more stuff.'
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).