Ann: Change in substantial holding-SDI.AX, page-22

"I wouldn't even consider those points negatives."

@Wini,

I guess we'll have to politely disagree on this. I feel quite strongly about it.

For, given my definition of an investment being something that puts money into my pocket each year, not take it out, to the extent that the Free Cash Flow from the business is reduced by the need to invest in intangibles, as well as the drag from working capital, these are factors that I cannot view as anything other than negative.

And the reason they are unambiguously negative is because capital that could otherwise have gone to my pocket has had to be diverted somewhere else in order to sustain the organisation (which is fine, but the point being made is that this diversion of capital is not reflected in the part of the financial statements that most people only look at, namely the P&L. So, looking at the P&L in isolation gives false signals, I'm afraid).


"Maybe they should expense R&D, but they are allowed to do it under accounting rules and as long as you are aware of it..."

Yes, but I'm not sure many people are aware of it.
Because the company doesn't spell it out for investors; one needs to actively look for it.

And if one isn't aware of it, one might be buying into a situation that is not quite reflective of reality, especially Free Cash Flow reality.... which I believe is the only thing that counts when it comes to the ability of the business to generate financial returns to shareholders (which, in turn is the ultimate arbiter of the fundamental valuation of the business).

This, to my way of thinking, underlines one of the flaws with the accounting rules: they are based on practices that are generally accepted by the financial reporting fraternity, but are still subject to much interpretation. (That's why the accounting standards are ever-evolving.)

In many instances - such as this one - there are a wide range of interpretations that can be considered to be perfectly appropriate; and yet their impact on different reported profit outcomes might be material.

When a company reports a Net Profit After Tax figure of $X million, most people take that figure at face value as an absolute. When, in fact, is is really just an approximation of profitably (not a bad approximation, mind, but an approximation nonetheless) predicated on a range of preceding assumptions, some which might be conservative and some which might be more liberal.

So really, what company management should say when they report their financial result is something along the lines of "We made a Net Profit After Tax of $Xm, plus or minus $Ym." to properly account for the possible range of interpretations of the accounting standards.
But obviously that isn't very practical.