EBITDA…C? There’s been signs of some creative accounting in the wake of COVID-19
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At the start of 2020, very few investors were factoring in the impact of a global health pandemic when assessing the outlook for company earnings.
The resultant hit to earnings – unprecedented in both its speed and velocity – has left many companies scrambling to adjust.
Speaking with Stockhead last month, Richard Sleijpen from UBS highlighted that more than 150 companies in the ASX200 had withdrawn earnings guidance.
And in the wake of the crisis, recent reports suggest the commonly-used metric EBITDA – earnings before interest, tax, depreciation and amortisation – has been given a bit of a tweak.
Across global markets, a number of companies have presented a new figure for ‘EBITDAC’ (EBITDA + coronavirus) when reporting their Q1 earnings numbers.
In effect, it’s a calculation of what their core earnings would have been if the global economy didn’t come to a sudden halt.
And overnight, the FT reported that some companies weren’t just using the metric to give their numbers a touch-up before going to market.
Bond investors in Europe are also growing concerned about companies using the metric in order to increase their borrowing capacity. In the current environment, those increased debt loads may often be larger than companies can handle.
Stockhead hasn’t seen evidence of the use of EBITDAC so far among ASX companies, but plenty of company results will be closely scrutinised heading into the business period on the local company calendar – June reporting season.
In one sense, it’s a reflection of the difficulty in ascribing an accurate valuation to companies during a health crisis, given it’s an external and unpredictable threat as opposed to internal mismanagement.
And if the health crisis recedes, the challenge now is determining which companies can return to normal and which will face permanent changes.
For now, small cap investors are keeping a close eye on how companies manage their earnings forecasts amid the uncertainty.
Earlier this week, shares in fibre network company Superloop (ASX:SLC) rose sharply when the company announced it was on track to meet full-year guidance previously announced in February, after briefly withdrawing guidance in March.
And if ‘EBITDAC’ starts to appear in the local finance lexicon this reporting season, it’s a good bet the announcement will warrant some closer scrutiny.