FRANKFURT (dpa) – In the past, what counted for many investors was chiefly a company’s net results – the actual money left over after expenses, taxes and interest payments.
But now investors have to worry about terms with a complex combination of letters – EBIT, EBITDA, and EBITDASO – and often enough, the concepts behind them are a mystery.Experience has shown that new market companies losing money try to make their results look better with certain figures, notes Ulrich Hocker, chief managing director of the German shareholders’ lobby group DSW.“But the fundamental principle is this: good results are in reality better, while poor results are even worse than reported,” Hocker cautions investors.Investors have finally gotten used to the terms EBIT (“earnings before interest and taxes”) and EBITDA (EBIT plus “depreciation and amortization”). But then the software company Brokat surprised everyone with EBITDASO (EBITDA plus “stock options”).Hocker said that companies busy buying up other firms were quick to use EBITDA.“Their results would collapse if the depreciation and amortization costs were included,” he said.The depreciation of a company’s own value, the so-called “goodwill depreciation”, normally would appear in a profits and losses account as expenses. But the German commercial code book HGB provides a number of choices, Hocker notes.“If for example a company charges the goodwill to its net worth, then the profit and loss account isn’t affected,” he said, cautioning potential stock investors to pay close attention to the fine print of how a company explains the accounting methods being used.Wolfgang Eisele, professor of finance and accounting at Hohenheim University, says that there is considerable room for manoeuvre in the way a company adds up its balance sheet. The data behind certain figures in the accounts might be murky or even downright false.“In addition, the depreciation period can, under the existing law, be pretty ad hoc,” he notes. This means that the period of use or the durability of certain abstract assets – such as patents in the bio- engineering industry or film rights held by media companies – depend strongly on market expectations.Eisele says that EBIT and EBITDA are, on paper, supposed to be clearly-defined terms describing a company’s track record.“But both exclude one aspect which can be considerably distorting – namely, debts,” the finance professor cautions. After acquiring other companies or, in the case of telecom firms, spending billions to acquire the third-generation mobile phone UMTS licenses, firms are finding themselves sitting atop a mountain of debts.“If interest payments cannot be serviced from revenues, then this becomes a liquidity problem, such as has now apparently become the case on the New Market,” Eisele said, referring to the German stock market segment involving young “new economy” firms.One example is MobilCom, which is suspected of having put its results in a better light than they actually were by changing its accounting methods.By German commercial code book rules, the telephone company’s losses in 2000 were about one billion marks (435 million dollars) higher than the 180 million marks losses as reported under the International Accounting Standard (IAS) rules.The key point in the divergence were the UMTS license costs of some 16 billion marks. Under IAS rules, those would only fall under the category of interest and depreciation starting in 2002 when the UMTS network starts up. Under the German commercial code, those costs should be immediately counted.Peter Thilo Hasler, a stock analyst for HypoVereinsbank, says that EBIT and EBITDA are very useful yardsticks used by professional business analysts.“We need internationally and industry-wide figures for comparison which are independent of national tax laws and accounting methods,” he said. But he dismisses as a “marketing gag” the concept EBITDASO.“Stock options belong to personnel costs and therefore are not deductible,” Hasler insists.During the “new economy” boom of two years ago, investors concentrated very little on companies’ financial results, notes Adrian Pehl of DG Bank Asset Management.But now the capital market sources have been largely pumped dry and many companies had to finance their growth by taking on debts. As a result, interest payments are now being more critically looked at by investors.When an overindebted company issues an ad-hoc report showing results only on the basis of EBIT, then this becomes problematic, Pehl said.“But the really sound companies list everything down and reveal all the key items,” he added.
