What Is Creative Accounting? We’ll Show You a Specific Example

SGMS is company with a long history of habitually reporting losses. They are also in a significant amount of debt — 8,937 000 000 to be exact — but on Feb.21st, something miraculous occurred; they reported a 2355% earnings surprise, causing the price of their stock to spike as much as 13% intraday

courtesy tradingview

If you go all the way back to 2008, you can probably count on one hand how many times they have released a positive quarterly report

The snapshot below is from their 2018 4th quarter earnings report, released on Feb.21, 2019 at 7:58am, before market open.

You can see that they report a $206 million net gain.  A massive increase compared to the 43.1 million loss they reported in the 4th quarter of 2017.  To the unsuspecting eye, that would seem like a big development right?   Not so fast.  Look at the image below.  You see where it says restructuring?  338.7 million right?   In the prior quarter, they put money aside in anticipation of a legal settlement.  They estimated that they would have to pay 338 700 000, and booked it as an expense.

Which is why this happened

Now, let’s take a look at their statement of operations from this miraculous quarter.

135+130+76.1+181.7+49.8+162.6+171.0=906.2, so where is this 564.5 coming from?  This is where the creative accounting takes place. Since the money they put away for the lawsuit ended up being more than what they needed to pay in the settlement, they just added it back to their earnings in the next quarter. Remember, they booked a 335 million expense in the prior quarter, and since they were sued for less than half of what they set aside, it eliminated the litigation expense from this report. Creative accounting.

Make sense now?  No?  Still doesn’t add up right? Well, they also did something that was rather unconventional.  They removed the depreciation, amortization and impairment expense.

What is also very telling is that if you look at some of their competitors, you will notice that none of them reported adjusted earnings during the same time period.  MGM and Caezars are both in the casino industry, and Revlon is owned by the same person that owns SGMS.

What SGMS did was report their earnings based upon adjusted financial measures, which technically you are not supposed to do.  Companies that are in their early stages, or in the middle of restructuring, will make adjustments to items such as one time expenses, interest payments, and amortization.  They do this because it better illustrates what the company would be making if not for these non operational expenses, and since most investors buy stock because they expect the company to grow later on down the road, it helps put into perspective what the company would be earning once these expenses were gone, but, these numbers are not usually reported as the actual net quarterly income.

SGMS did say it was adjusted, but they were not very forthright about it, which is why many news outlets reported this earnings growth like it was their actual net income, and not their adjusted net income, which again, is very unusual because its not the actual net income, it is pretend net income — a what if.  Its like when somebody complains about losing a game and says, “oh, well if this didn’t happen, and that didn’t happen, I would have won”.   Check this out

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What also made this earnings report stick out so much was the fact that, for almost 20 years now, the company has rarely reported positive net income

2007-2009

Continued

2010-2012

2013-2015

2016-2018

If you do the math, you will notice that over the past six years, they paid $3 billion in interest. What is ironic about this is that, if not for these outrageous interest payments, the company would have been generating positive income for three of these years. What is even more ironic is that when you divide the 2018 interest payments by their total revenue, you get 17.75%, which is about the rate you would receive from Bank of America’s Travel Rewards Card.

It’s no wonder they felt they had to apply these creative accounting tricks.

Until the next time everyone, enjoy the night, and read the disclaimer!

****DISCLAIMER****This is all our opinion, and we are not financial advisers. You should consult a financial adviser before making any decision with regard to publicly traded securities, or any security for that matter. This company carries an extremely high degree of risk. You should consider this information as similar to personal insight from a peer/friend/acquaintance, and thus it should, obviously, not be the primary source material for basing an investment decision, because, similar to any opinion from a peer/friend/acquaintance, it could be completely and utterly incorrect! Good luck and happy trading everyone****

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