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Are Our Investments Still Profitable?
A couple of weeks ago I did a blog entitled “Time to Focus on What is Important” referring to the profit reporting season, where companies update shareholders on how they are going.
Well how are these businesses going?
Last year companies profitability suffered greatly because of an accounting term called “write downs”. This is when a company has an investment/asset on its books for certain value and then they reassess that value downwards as the asset is no longer worth that much money. One of the examples of this is with Crown Casino (CWN) who invested $1.377 billion in overseas casino operators, which include stakes in Cannery Casino Resorts LLC and Fontainebleau Resorts LLC. These investment are now on the books as they were “wrote down” in previous accounting periods to $50 million in the company’s accounts, or 3.6 percent of their original value. In this reporting season for the 6 months ending 31 December 2009 they are back to making money from the underlying casino operations, people gambling, with Melbourne casino making $243 million and Burswood Casino in Perth making $112 million. This is what we want to see as long term investors. Interestingly if the overseas assets recover they will then increase the value of those assets which will have the opposite impact to profitability from an accounting perspective.
Property companies are classic examples of this phenomenon of “write downs” as real estate values fall they reduce the assets value on the accounts (based on valuers valuations) even though the underlying asset will still be receiving rent (probably more than last year) and continuing to meet its expenses.
As investors we like to look at the “operating profit” of the business which excludes factors such as write downs and looks purely what the company does day in and day out be that gambling, collecting rent, selling groceries or whatever. As over the long term it’s the profitability of these operations that will constitute a company’s value proposition. The good news is that the operating profitability of these companies is expanding from where it was last year which is great news for us as owners of those businesses.
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