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RTNL
Inflation adjustment of assets/ capturing asset writedowns

Hi all P123 Gurus:

Is there a way to adjust fixed assets for inflation? and 2. capture writedowns through the years

I was reading the Semper Augustus letter of 2018 and they make this point

The largest drag on equity results from the writing off and writing down of asset values. This is not the economic depreciation of fixed assets, which if properly reserved for and replaced can sustain ongoing normal profitability. These are write-offs and writedowns having to do with asset obsolescence or a sustained lack of profitability on the assets and on equity. Sometimes the charge is genuine – Borders didn’t have much use for the real estate, the hardware and even the inventory it marked down when closing stores prior to its going out of business. But sometimes managements like to take an eraser to asset values, for an asset writedown equals an equity writedown, and if you look like a better manager because your return on equity is higher, then, well, you may prefer an understated equity value. Shocking, I know. Stock prices ultimately or usually catch on to this, however. The drag is huge.

Since the end of 1988, write-offs and writedowns have averaged almost 15% of profits per year. During slowdowns, the total is higher (think kitchen sink or big bath accounting if you are familiar with the terms). During heady times, the total is lower. But added up, losing 15% of profit over time is penal.

A 15% profit writedown shaves a 15% return on equity by 2.25% to 12.75%. If the return is 13%, the shave is 1.95%. Hence, a 13% headline return sees it trimmed to 11.05%. The latter represents the degree to which the historical return on equity has been reduced by write-offs and writedowns.


If that is not the case historical ROE should equal long term stock returns (over 20 years) a point which Buffett and Munger make

Aug 14, 2019 2:29:58 PM       
yuvaltaylor
Re: Inflation adjustment of assets/ capturing asset writedowns

There's a long paper here that makes a similar point, using depreciation rather than write-offs and write-downs: https://osam.com/Commentary/the-earnings-mirage

Unfortunately, you have to look at the company's actual financial statements to get some sense of the write-offs and write-downs. You can't get them from P123, as I think they're variously incorporated into COGS, inventory changes, special items, and elsewhere (if I'm wrong about this, somebody please correct me).

Yuval Taylor
Product Manager, Portfolio123
invest(igations)

Aug 15, 2019 10:32:44 AM       
RTNL
Re: Inflation adjustment of assets/ capturing asset writedowns

Thanks Yuval - is an asset writedown/off field available in SP compustat, and can P123 access it?

Aug 15, 2019 1:49:41 PM       
pdemartino
Re: Inflation adjustment of assets/ capturing asset writedowns

We offer accumulated depreciation -- AccumDepTTM and its ilk -- but you can't divine management intention from it. The Borders example will look just like the evilbad manager who's pumping return on equity.

I thought of a ratio of ROE to AccumDP:

Gr%TTM("ROE%")/Gr%TTM("AccumDep")


Honestly, that didn't test too well as a rank, but maybe you can make it work with something else.

When it comes to inflation, everything on P123 is in nominal terms. You might be able to juryrig something with Close(0,#CPI).

My general advice for inflation, though, is that economic historians assume a doubling of prices every 20 years. We've been about on pace to that standard over the period that P123 follows, and that works out to about 3.5% annually. So just deduct 3.5% from the annualized return and be done with it. I don't think that's what you want, but I think it's the best way to deal with inflation on this platform.

Aug 15, 2019 2:39:50 PM       
wwasilev
Re: Inflation adjustment of assets/ capturing asset writedowns

SpcItems is a dumping ground for items like write-downs but it contains other items, too.

For fun, try this in a Series;
100*UnivSum("True","SpcItems(0,QTR)")/UnivSum("True","AstTotQ")


Walter

Aug 15, 2019 2:50:36 PM       
yuvaltaylor
Re: Inflation adjustment of assets/ capturing asset writedowns

Thanks Yuval - is an asset writedown/off field available in SP compustat, and can P123 access it?


No, and I don't think any data company offers it. Think about it: you can write off undelivered inventory, you can write off worthless intangibles, you can write off fixed assets (a broken truck that hasn't been fully depreciated), you can write off unpaid receivables, and you can write off bad debt. And some people think of tax credits as write-offs. All of those would go into different places in your financial statement.

Yuval Taylor
Product Manager, Portfolio123
invest(igations)

Aug 15, 2019 2:54:30 PM       
yuvaltaylor
Re: Inflation adjustment of assets/ capturing asset writedowns

And regarding inflation, see https://fred.stlouisfed.org/series/MICH or https://fred.stlouisfed.org/series/T5YIFR

Yuval Taylor
Product Manager, Portfolio123
invest(igations)

Aug 15, 2019 2:58:39 PM