Ann: Media release, page-26

They paid 12.2 Million dollars for a practice with an EBIT of 1.2 million so that is approx. 10x EBIT.

Nope. $12.2m for EBITDA (not EBIT) of $1.2m, so 10x EBITDA. And that $1.2m represented the trailing EBITDA when they bought it. We don't know how much its EBITDA contribution increased from that starting level. Also, the $12.2m includes the cost of the Cammeray business acquired, and we don't know how much EBITDA it generated in FY2015.


A significant portion of this goes on the books as goodwill.


Yes. $7.1m, of goodwill, to be exact. Had you incurred the limited effort to thumb through the financial statements you wouldn't need me to confirm it with you. It's right there for all to see. No mystery.

And as I've said before, that's what the accounting standards require. You seem to have an issue with it but cannot propose an approach you deem to be less inappropriate


"The selling Dentists work out the contract period and produce the results they were contracted to do then they leave."

They do? Is that a given? I have met vendor dentists who remain happily ensconced within the ONT framework for years after cashing out, happily drilling and filling teeth without the hassle of managing administrative paperwork.


"New Dentists come in they maintain the figures but in order to do this they gradually burn of the clients (This is the bit where goodwill is being converted to profit). The CDDS scheme prolonged this burn-off period. "

And again, your use of seemingly unnecessarily vague colloquialisms makes it hard to know what you are trying to argue. In more common business speak, can you explain what it means to "burn off" patients? And, following that, what the basis is for "the CDDS scheme prolonging the burn-off period"


"Now at some point if my assumptions are correct the practice has to be sold off at a vastly reduced goodwill or it is just closed down. New practices must be bought to maintain the profit/profit growth."

Why is this necessarily the case? What evidence can you provide of this?

Why - in what I believe to be the uncommon event that the vendor dentist serves his or her time and leaves/dies/gets run over by a bus - doesn't ONT simply recruit a new dentist to the practice? Sure a new, incoming dentist might not have the same level of experience of the departing one, but the incoming one is (presumably) adequately qualified and knows how to do his or her job without maiming or killing patients.

Presumably, the only time the practice withers and dies is if the demand for dental services dries up for whatever reason. If my local dentist retires, and another remotely competent one steps into his place, it stands to reason that the practice will remain as busy at it always was.

The reason I say this with a degree of conviction is that I have observed this first hand.

To get an appointment at my local dentist shop is as hard now as it has always been, even when the old guy who started it handed over to some 38 year old. (Actually, funny story: my kids actually preferred the younger guy's chairs-side manner and getting them to the dentist was became less of an ordeal.)


3. With regard to the 3.1 million dollar improvement in EBIT since the CDDS, I agree on the face of it this looks great. I am just not clear on how these vouchers work. If they sold 100 vouchers in June at average value of $4000 then this is 400k booked to profit for work that is not yet done? That would be significant. Would you be suspicious if Myer were selling $5000 gift vouchers for $4500 (paid off over a couple of years) just prior to the end of the financial year?

Yeah, like I said before, in far less than the time you have taken to draft HotCopper posts about the revenue recognition in relation to these vouchers, you could have skimmed through the notes to the accounts and discovered that Revenue related to treatment plans is recognised on the accrual basis, whereby revenue is recognised when the service is provided.

(If you don't understand what that means, I suggest you study an accounting textbook or ask a friend or colleague to explain it to you. Because if you don't mind, I am not going to go into the theory and practice of accrual accounting... I think it is reasonable that anyone who wants to invest in a publicly-listed company requires a minimum level of assumed knowledge.
Both some assumed knowledge and also having at least read the financial statements before asking questions whose answers exist conveniently within said statements.)

But what I will indeed offer by way of an explanation as to the veracity and the quality of the financial statements is a reasonableness test I like to use to assess to what extent any accounting alchemy is being employed by boards and their auditors, and that test is to reconcile the Cash Flow Statement with the P&L.

Specifically, to compare Net Receipts with EBITDA, after making adjustments for movements in working capital (which affects Net Receipts, but generally not EBITDA) and movements in provisioning (which affects EBITDA but generally not Net Receipts).

For while a P&L can be made to tell all sorts of untruths about financial performance if company managers and auditors so wish, the Cash Flow Statement only ever tells the truth.

Now, while this is not an exact science, it is a very useful Ready Reckoner - I have found over long periods of time - as a forensic accounting tool to detect to what extent company managers and their auditors are taking liberties with things such as premature revenue recognition or cost deferrals and/or capitalisation.

In my experience, very few companies have ratios consistently of 100% (100% being the theoretical perfect business). Most companies come in at around 80% and dubious ones at 70% and below (engineering construction and agricultural businesses are particularly bad).
Any measure consistently above 90% I find is associated with premium quality companies that cause no undue earnings shocks because aggressive and imprudent accounting treatment eventually catches up with them.

For context, here are the metrics for ONT in the time I have covered the company:

Adjusted[*] Net Receipts/Adjusted EBITDA[#]
[*] Adjusted for working capital movements
[#] Adjusted for movements in provisions

FY2006: 87%
FY2007: 91%
FY2008: 92%
FY2009: 99%
FY2010: 88%
FY2011: 90%
FY2012: 93%
FY2013: 97%
FY2014: 88%
FY2015: 93%

Over time, on this earnings quality metric, ONT has averaged 91% with the variance confined to a nice, reassuring tight range from the high 80%to the low 90% region.

I am happy to put my neck out and say that when ONT reports Revenues of X and Costs of Y, that those figures are a most fair reflection of what is happening in reality.


"4. I think and I stand to be corrected the accounts show 230K from sale of a practice? If this is true the evidence is there for goodwill being burnt off."

Who knows if this relates to the sale of a practice? It might be the sale of some dentist chairs, or some office furniture or maybe some property in a sale-and-lease back arrangements. Or a combination of all of these.

Probably on the grounds of materiality, the accounts don't provide that level of granularity.

But assuming it did relate to the sale of a practice, to know if goodwill has been impaired (which I'm guessing is what "burnt off" implies), we would need to know what was initially paid for the practice in question (and gain, that's assuming its a practice we are talking about here and we can't know for sure).

That's the thing with financial statements: there is a trade off between expediency and detail, and accounting disclosure standards are designed, by largely using materiality criteria to get the balance right between expediency and detail, in order to make it easier for people like you and I.

In essence, the guiding principles of financial reporting say that only if it matters should detail be provided. Otherwise, annual reports would end up filling hundreds of pages.

If that's inadequate for your depth of analysis, maybe you could contact the company and ask to see copies of the monthly management accounts.

I doubt they'll agree, but no harm in giving it a whirl, is there?