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Another day, another write-down

We were disappointed by the text in a profit downgrade released by Sims Metal Management (ASX: SGM) when it was announced back in May. The release was written in legalese, replete with long sentences and blaming just about every reason under the sun.

If the company was intending to do its best to inform shareholders, it’d be hard to suggest they met that aim.

Just under three months later, the company has again updated the market. At least this time there was more detail, with Sims now forecasting a $521m loss for the full year.

In May, Sims suggested profit would be “materially less than 85% of the prior corresponding period”.

I think we can safely call that an understatement!

Shareholders unsurprisingly have taken a knife to the share price, sending the company’s shares down almost 8% in mid-afternoon trading.

The company was plunged to that $521m loss courtesy of a write-down of goodwill. Stripping that out, the pre-write-down profit was $73m – a very, very slim margin for a company with $9 billion in revenues.

Write-downs have been something of a feature of this earnings season, with BHP Billiton (ASX: BHP), News Corp (ASX: NWS) and Leighton Holdings (ASX: LEI) all feeling the chill of the auditor’s pen in recent weeks.

Foolish takeaway

Sims Metal might just be the latest in a string of write-downs, but the result serves to remind shareholders that while they might be a shock, they rarely come completely out of the blue.

The impact of non-cash writedowns might just be an accounting entry, and not impact the company’s cashflow, but it should give shareholders pause to review the acquisition strategy of the companies they own, to make sure these current sins aren’t repeated.

And just once, I’d like to see a press release where management say ‘we were wrong’. I won’t hold my breath.

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Scott Phillips is an investment analyst with The Motley Fool. You can follow Scott on Twitter  @TMFGilla The Motley Fools purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691)

 

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