THIS IS MY 182ND BLOG ON UNDERSTANDING MONEY
TOOLS
January, 2020
In this blog/tutorial we are going to look at “Ebitda” and
more. This is very important for
analysis of a company’s financial health, and perhaps the reasons for buying or
not buying a company’s stock. We
are also going to use this and “more” to back up my long time premise that the
US and world economies are living in a falsehood and are not healthy.
First, we have covered Ebitda in a prior blog. It is a representation of a company’s
financial reporting of “earnings”, “before” “interest” paid out, “taxes”,
“depreciation” and “amortization” of goods and equipment; thus Ebitda.
I recently had a good discussion and debate with a close
friend over using this method of reporting, or not using it. I am not for it. Apparently, our government’s “Government
Accounting Principles” (GAP) is
permitting this reporting publicly including the use with Wall Street
numbers. Ebitda is a company’s
operating performance on an income statement not including two of the most
important items, interest expense and taxes paid. Therefore it is not “net
income”. In past years we may have
used “net earnings before taxes”.
The major component that skews numbers of earnings in the wrong
direction is corporate interest on loans and bonds. Corporate debt is currently at $15.5 trillion, a number we
have never seen before. The second
important figure omitted in earnings is taxes, not just Federal taxes. Mr Trump lowered the highest possible
Federal corporate rate to 35%.
If you take many companies the numbers between operating
profit (Ebitda) and net income they may be far different. Operating income may show a company
with a huge profit when in actuality they are losing money like crazy. Prime examples may take you to Amazon,
Uber and General Electric which pay little or nothing in taxes compared to
revenue. These large companies
employ the best tax law firms and accounting firms to “play” with numbers. This is one prime reason I believe in a
“flat tax” for both individuals and corporations. It would even the playing
field between the wealthy who can afford the top accountants and middle class
workers.
Why is the government permitting this and what fears do I
have?
- Financial
reporting in this manner makes buyers of stock more willing to buy into
markets.
- Companies
can use this higher operating figure to leverage themselves by borrowing more
money at low interest rates and do two things: issue more bonds getting
themselves into more debt and using this borrowed money to buy back their own
stock thus further raising the price.
- If
people view their stock portfolios at higher figures they can borrow against
their stocks and stock funds up to about 50% of value, increasing debt and
responsibilities.
- When
the perception that things are “rosie” in the economy people are more
optimistic, thus they will buy more products and keep the economy rolling at
about 2% growth.
- With
political elections coming up in about 10 months the Republicans will do
everything to prevent a downturn in the economy and stock markets. (And by the way, I am an independent
voter who votes both parties.)
Now, a bit “more” to this blog. Jim Rogers, the hedge fund and investment manager who I have
followed since the late 1970’s came out publicly today with a scathing
editorial about our economy that I agree with. My old expression, “debt kills” is reaching astronomical
figures. Most countries around the
world have dropped interest rates to nothing or negative and are printing money
like crazy. Our government has no alternatives left than to print more money,
and place a lot of it “off balance sheet”, thus you will not see this debt
increasing our reported debt of $23.3 trillion. Again, our banks are in trouble and it was recognized on
about September 22nd of last year when the overnight “Repurchase
Agreement” (REPO) rates shot up to 10% from the 2% norm. Banks would not lend to each other so to
meet capital requirements banks went to the last resort, our Federal Reserve.
With executive order Mr. Trump our Treasury Department in
conjunction with the Federal Reserve have been placing tons of money into the
banks and stock markets. You can
watch the irregular stock trading going on. Since September 22nd this money has amounted to
about $2.5 trillion and last week the government announced it will continue
this off balance sheet spending for the next few months. “OMG”, this is trillions of dollars to
falsely pump up markets and keep us economically alive. If you look at our most conservative
stock index, the DOW, you will find that the price to earnings ratio has jumped
from about 28:1 a couple months ago to a current 30.7:1. All this tells you is that the price
just keeps rising without corporate earnings increasing with relativity. (The DOW average P/E should be 15:1.)
According to Jim Rogers it is not just the US. Quote Mr. Rogers today, “the Bank of
Japan is printing money to buy bonds and stock Exchange Traded Funds; the
European Central Bank is mired in insane negative interests”, “we and they will continue this
“madness” as long as it is necessary”.
There is little that can be done as production and taxation can never
repay debt. At some point the
people and buyers will say this Ponzi game is over and not buy the “junk”,
meaning stocks and many currencies.
Permit me to include approximate current debt figures here
in the US. Since the Great
Recession of 2008-2010 we have built an economy based upon “cheap money
lending.” This should concern
everyone.
- Reported
US debt: $23.3 trillion
- Non-reported
US debt: ?, but trillions
- Credit
card debt: $1.5 trillion
- Student
loan debt: $1.6 trillion
- Auto
loan debt: $1.2 trillion
- Home
mortgage debt: $8.8 trillion
- Corporate
loan debt: $15 trillion
- Lines
of credit: ?
The strategy for many a corporation is leverage. The theory we can borrow money at
4-10%, however our earnings are e.g. 12% is great, but what happens if we go
into a strong recession or depression?
Revenue slips much faster than companies can reduce costs. Company bonds are usually issued
“short-term” up to 3 years, “mid-term” 5 to 10 years and “long term” beyond
that. The longer the term of the
bond the higher the interest rate.
A company can reduce costs and terminate employees, but they can’t
retire bonds unless they have cash on hand. (By the way, company bonds normally have a “call”
provision. This means if they
issued bonds yielding a high interest rate they can call the bond, pay it off,
and refinance at a lower rate.
Newer bonds are at low rates of interest so companies may not be able to
favorably refinance debt.)
I can’t say “I hope you enjoyed this blog”, but I hope you
gained some knowledge and current information from it.
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