Category Archives: cash flow

15/5/16: Gamable EPS and Shares Buybacks

EPS (Earnings per Share) is a corporate metric that is often pursued by the corporate managers and executives to increase their own payouts, and confused by investors for a signal of company health. As is well known (and we show this in our Risk & Resilience course), EPS is a 'gamable' metric - in other words, it can be easily manipulated by companies often at the expense of actual balance sheet quality.

And I have written about this problem here on the blog for ages now.

So here is a fresh chart from the Deutsche Bank Research (via @bySamRo) detailing shares buybacks (repurchases) contribution to EPS growth:

In basic terms, there is no organic EPS growth (from net income) over the last 7 quarters on average and there is negative EPS growth from organic sources over the last 4 consecutive quarters.

As noted in my lecture on the subject of 'EPS gaming', there are some market-structure reasons for this development (basically, rise of tech-based services in the economy):

Source of data: McKinsey
Source: McKinsey

However, as the chart above shows, shares buybacks simply do not add any value to the total returns to the shareholders (TRS) and that is before we consider shift in current buybacks trends toward debt funded repurchases. So, in a sense, current buybacks are rising leverage risks without increasing TRS. Which is brutally ugly for companies' balance sheets and, given debt covenants, is also bad news for future capex funding capacity.

27/4/16: The Debt Crisis: It Hasn’t Gone Away

That thing we had back in 2007-2011? We used to call it a Global Financial Crisis or a Great Recession... but just as with other descriptors favoured by the status quo 'powers to decide' - these two titles were nothing but a way of obscuring the ugly underlying reality of the global economy mired in a debt crisis.

And just as the Great Recession and the Global Financial Crisis have officially receded into the cozy comforters of history, the Debt Crisis kept going on.

Hence, we have arrived:


U.S. corporate debt is going up, just as operating cashflows are going down. And so leverage risk - the very same thing that demolished the global markets back in 2007-2008 - is going up because debt is going up faster than equity now:

As ZeroHedge article correctly notes, all we need to bust this bubble is a robust hike in cost of servicing this debt. This may come courtesy of the Central Banks. Or it might come courtesy of the markets (banks & bonds repricing). Or it might come courtesy of both, in which case: the base rate rises, the margin rises and debt servicing costs go up on the double.