One of our most interesting jobs here at Stockopedia is digesting the daily news with our community.
Unfortunately, reading the daily company news is not as straightforward as it perhaps should be.
And if it's tricky for us, then it's downright tough for those who don't do this for a living!
Browse any popular bulletin board and it won't take long before you find beginner investors, unfamiliar with the standard practices of the City, who have been led astray.
In this article, I’m going to focus on five ways that trading statements deceive investors. I'm not going to name any particular companies, but I'm sure you'll be able to think of your own examples.
And whether you're a beginner or a long-in-the-tooth interpreter of company announcements, I hope this list helps to arm you well during the 7am rush!
The Voynich Manuscript is considered to be an indecipherable document, but it actually makes more sense than some RNS announcements. Image source: Wikipedia.
1. Mealy-mouthed phraseology
There are numerous mealy-mouthed phrases that sound encouraging, but which lack specificity. The standout example of this over the past year has without a doubt been “profitable growth”.
This phrase has been used by good companies and bad companies, in both positive and negative trading updates. But never has it improved an investor's understanding of a company's performance.
The phrase itself is meaningless. Let’s break it in two:
“Profitable” - can in theory refer to after-tax net income, or pre-tax profits, operating profit, or EBITDA, along with adjusted versions of all of these. But is a company with positive adjusted EBITDA really “profitable”, if all of the other measures are in the red? I would say No.
“Growth” - this doesn't relate to profits, despite its proximity to the word "profitable". Instead, it relates to revenues, and in theory it should guarantee rising revenues. But depending on how this awful phrase has been used, even that achievement might just be a vague aspiration.
So when you read that a company is looking forward to achieving “profitable growth”, I would mentally write that sentence off completely.
The absolute worst thing you could do, when you see this phrase, is to conclude that the company is profitable -…
