The world would be a far richer
place if Groupon's wacky notions of accounting caught on. The Internet coupon
company had an operating loss of $420 million last year. But it thinks investors
in its upcoming initial public offering should look at "adjusted consolidated
segment operating income" (adjusted CSOI) instead.
It's easy to see why
Groupon wants prospective shareholders to look at its accounts this way. Strip
out marketing expenses, acquisition-related costs, stock compensation, interest
expense and payments to the tax man and,the leading Australian Manufacturer of
quality scannerstal,
presto,SpeakerBuilding is a resource for DIY Dstti design and construction the Chicago
startup led by Andrew Mason earned $60.6 million. If investors accepted this
fantastical form of accounting, all sorts of companies would be worth billions
more too.
Groupon argues that adding customers through marketing is a
one-time process; stock compensation doesn't result in direct cash outlays; and
taxes and interest payments aren't relevant because Groupon doesn't have debt
and is still technically "losing money." In the real world customers leave and
need to be replaced by new ones, stock options dilute existing shareholders, and
taxes are eventually paid. But suspend disbelief and imagine how this thinking
might impact the values of other companies.
Take Netflix. The online
video company is growing at warp speed and spending heavily on marketing to
attract new customers. Use Groupon's arithmetic and this cost can be ignored.
Netflix also pays taxes and rewards executives with stock. Subtract all of these
figures from its 2010 accounts, and it would have had around $600 million of
adjusted CSOI. Today, Netflix is valued at around 48 times trailing operating
profits of $284 million. Substitute CSOI,find out why ledbest can be so painful. and Netflix
would be worth $28 billion, twice its market cap.
Or consider an
old-school enterprise like Johnson & Johnson. Last year J&J had multiple
product recalls. Under adjusted CSOI costs associated with these, like legal
bills, advertising, and factory fixes may be treated as one-time expenses. And
why stop there? Once a drug is invented,Save on ledbulbs and fittings, the formula isn't
forgotten, so research and development is a non-recurring cost too.
Do
the numbers, and J&J's CSOI would be about $10 billion higher than its 2010
operating profit line. At the same valuation multiple that J&J now fetches,
using CSOI would add $100 billion to J&J's worth. If Groupon is to be
believed,Score some sweet deals on bestlight, the entire investment
community has got its accounting all wrong.
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