Companies have always strived to present their financial results in the most flattering light. Now some are going a step further, presenting a new customised metric they are calling ebitdac: earnings before interest, tax, depreciation, amortisation – and coronavirus.
This week Schenck Process, a German manufacturing group, added back €5.4 million of first-quarter profits that it said it would have made were it not for the hit caused by state-mandated lockdowns. Its operating profit for the period - "adjusted ebitdac" of €18.3 million – was almost 20 per cent higher than the same period a year earlier, rather than 16 per cent lower.
Schenck Process is not the only company tinkering with the presentation of its results. When The Azek Company, a Chicago-based manufacturer of building products, raised $325 million (€301 million) of junk bonds last week it included a term that would allow it to add back "lost earnings" as a result of Covid-19 in future. That was a first for the corporate debt market, according to research firm Covenant Review.
But the adding back of profits lost to the viral outbreak has bemused some observers.
“When you’re looking at coronavirus, these revenues will never come back; it is literally a fiction,” said Sabrina Fox, executive adviser at the European Leveraged Finance Association.
The add-back was “not ideal”, said Rob Jones, senior credit analyst at Insight Investment, an asset manager. He said such adjustments went beyond the usual tweaks that companies made to polish their numbers. “These are lost earnings you’re adding back, as opposed to potential earnings added on.”
Schenck Process, which was bought by private equity firm Blackstone in 2017, declined to comment.
Other investors said they are concerned increased usage of this new brand of ebitda could allow companies to relax restrictions on how much they can borrow. Some companies that have had their revenues plunge because of nationwide lockdowns have sought waivers from their banks to ease their discomfort.
“How can they quantify whether a loss in revenue is purely down to coronavirus and not revenue they’ve lost to competitors or for regulatory reasons?” asked Nick Kordowski, Edinburgh-based head of fixed income non-financial research at Aberdeen Standard Investments.
Schenck Process included “ebitdac” in its glossary of terms used in its first-quarter presentation, alongside more familiar acronyms such as A/P (accounts payable) and ESG.
Ms Fox of the ELFA said the trend should be resisted. “It’s a bit ironic to say we’re adding back the effects of coronavirus to deal with the effect of coronavirus,” she said. – Copyright The Financial Times Limited 2020