Friday, March 6, 2009

Ebitdo: Earnings before interest, depreciation and obfuscation

By Paul Murphy (FT Alphaville):

John Hempton at Bronte Capital has been running some punchy posts about General Electric and its apparent addiction to voodoo maths and weasel words.

The general gist is that GE is being far from transparent on how — and over what period — it will deal with the losses and impairments sitting in GE Capital, which may range anywhere from $35bn to $70bn.

Hence GE stock being back at 1991 levels.

There is evidence of this “weasel discount” in the UK, where companies who obfuscate get punished, severely.

That’s why Barclays can’t shake off the bears, why Aviva crashed 33 per cent on Thursday and why Legal & General is now trading at a price last seen (briefly) in September 1992.

The urge amongst management to declare their businesses to be undeniably profitable and well-capitalised is understandable. But if they are then unable or unwilling to provide the detail backing up such statements, investors take a precautionary view — which is understandable in the circumstances.

There’s a break-down in trust. If an executive is not open, he or she must be hiding something. And if that’s not the case - hey, what does the management know? We’re in the middle of a financial crisis.

The suspicion is that Aviva, L&G and so many others have failed to observe the first rule of crisis management: Get all your bad news out. Fast.

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