Good morning!

Here's an interesting snippet for you - in the US, between a survey of CFOs found that they believe 20-30% of listed companies "intentionally misrepresent" earnings.

That range sounds very much in the right ballpark to me, based on my work interpreting financial results. Also bear in mind that CFOs are the guys who prepare the numbers, so they know what to look for.

So we all need to be very careful when valuing companies on a multiple of adjusted, pre-exceptional EBITDA! (not that any readers here would be so daft!) Chances are the figures have been manipulated in some way, and hence we will be led towards over-valuing the shares. Therefore it's very much worth checking all those footnotes, and valuing companies on traditional, un-manipulated figures perhaps?

Possible changes to corporation tax - interest deductions

I tend to be so busy scrutinising company results, that sometimes I miss forthcoming important changes to laws, taxes, etc. So I'm particularly grateful when people flag up important issues to ponder. Roger Lawson recently posted an excellent blog on ShareSoc's website, asking "What's spooking the commercial property market?".

In this article he outlined how changes are afoot to possibly restrict the amount of interest charges which companies can deduct against profits when calculating their corporation tax liabilities. Roger says;

According to the FT article, it is possible the Chancellor will not allow interest costs in excess of 30% of EBITDA to be allowed against corporation tax. Potentially this could affect any companies that are highly geared or have large assets which are financed via debt.

I have therefore done a quick review of my portfolio, to make sure there are not any companies that might be affected by it - by comparing the P&L interest charge with 30% of EBITDA. The only share that came close for me, is Enterprise Inns (LON:ETI).

In this case, the highly-geared pubs group last reported EBITDA at £296m (before exceptionals - it will be important to see whether or not the tax proposals allow adjustment for exceptionals?), and the P&L interest charge (before exceptionals again) was £158m. So I make that a 53% proportion - well over the likely 30% maximum - suggesting that ETI is likely to see its corporation tax bill increase significantly. This could well explain why its shares are down 30% YTD.

Overall, this proposal is an excellent idea…

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