AreBlinkx(LSE: BLNX),Quindell(LSE: QPP) andMonitise(LSE: MONI) using accounting trickery to boost their financial figures? Depending on who you ask, the answer to this question can vary greatly. But in practice, most of the confusion stems from one figureL the earnings before interest, taxes, depreciation, and amortisation (EBITDA) metric.
EBITDA has its uses. Indeed, it has become an extremely popular standard to measure business performance over the past few decades. However, few financial metrics are as easily and frequently manipulated as EBITDA. In fact, Warren Buffetts multi-billionairesidekick,Charlie Munger, has gone so far as to say that:
every time you see the word EBITDA, you should substitute the word bulls**t earnings.
Nevertheless, on its own EBITDA can be a useful figure, but its so easily manipulated and adjusted that it is often easier to ignore it all together. For example, companies can often add items such as salaries and bonuses, professional fees, start-up costs and non-arms length transactions back into EBITDA, boosting the reported profit. Of course, the business is still paying for these costs but, by using accounting smoke and mirrors, the costs are hidden away.
Blinkx, Quindell and Monitise all make use of adjusted EBITDA to report results.
Blinkx, for example, reported adjusted EBITDA of just over $1m for the six months to 30 September 2014. However, in the footnotes of the companys half-year results release, management notes that:
Adjusted EBITDA is defined as profit attributable to equity holders of the parent before interest, taxes, depreciation and amortisation, share based payment expense, and acquisition and non-recurring costs.
These financial measures do not have any standardized meaning prescribed by IFRS and are therefore referred to as non-GAAP measures. The non-GAAP measures used by blinkx may not be comparable to similar measures used by other companies.
Quindell and Monitise are not as aggressive in their accounting. The two companies do report their financial figures according to IFRS standards at least thats what their financial statements say although there is still some trickery going on, I believe.
Monitise still expects to be EBITDA profitable by full-year2016 but is addingexceptional items, impairments and share-based payment charges back into these figures. Meanwhile, Quindell adjusts its earnings per share toexclude exceptional costs, share-based payments, any gain on re-measurement of acquisitions/investments and amortisation
It pays to pay attention
These adjustments arent against the rules, though, and many companies make such adjustments.
That said, aggressive accounting practices like these can mislead investors about the health of the business and isan investing red flag for me. It always pays to carefully assess the numbers to try and discover what accountants could be hiding.
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