WHEN big companies announce write-offs, they tend not to do things by halves. Back in 2008 AIG, an insurance group rescued by the American government, reported an annual loss of $99 billion, with almost $62 billion of that occurring in a single quarter. In 2001 JDS Uniphase, an optical-equipment maker, chalked up a deficit of $56 billion.
Such losses are so big they can seem almost unreal. That can serve a dual purpose. First, the deficit can be dismissed as the product of “mere accounting”, the result of pedantic number-crunching. Assets have been written down in value, but that is not the same as a cash loss. Second, when new managers are appointed, a huge loss can be blamed on the previous regime. All the bad news can be revealed at once, a phenomenon known as “kitchen-sinking”. From that point on, the only direction for profits must be up.
Analysts tend to be very supportive of such arguments. They typically dismiss big write-offs, even when they failed to forecast them. They argue that it makes more sense to focus on operating profits, which reflect the health of the underlying business. These, it is said, are a better guide to the future direction of the firm.
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