![]() Taking big baths during trough cycles in the industry or during economic recessions is hardly a coincidence. The company may have taken a big bath two years ago and is still basking in the glory attributed to their “turnaround” of the century.Īnother thing to look for is when does the company typically incur one-time charges. It is, therefore, crucial for an investor to not just look at the current year financial reports. If one-time charges begin to show up every other year, this becomes a worrisome pattern. One thing to look out for is the frequency of big baths. ![]() īecause one-time charges could very well be valid, sniffing out the smell of big bath accounting is not easy. In 2001, Cisco wrote off more than $2 billion in inventory even though some of the inventory was not worthless and would be sold in the future, thus resulting in pure profits from these future sales. At the other end of the spectrum, writing off everything you can imagine with the goal of locking in huge performance bonuses in subsequent years is just plain evil. This is akin to investors selling our losers at the end of the year to lock in the tax benefits to offset profits next year. Sale of discontinued operations, accelerated depreciation of inventory, plant and equipment, write-off of an investment gone south and restructuring charges are some of the most common one-time charges.Īt one end of the spectrum, recording reasonable one-time charges before the end of the year for tax benefits is legal and could benefit shareholders. So, pay close attention to special one-time charges. In a big bath, management would write-down substantial assets, that don’t occur under normal operating conditions, in order to maximize future benefits. ![]() The Usual Write-down / Write-off Suspects The sweet-talking CEO never fails to wrap up with a personal assurance that the company is well poised to seize the opportunities when the market returns to more favorable conditions. They would either blame it on previous management or the challenging economic conditions. Needless to say, management wouldn’t take the blame for the fall. The reasoning behind taking a big bath is quite simple: We already look bad, so let’s make ourselves look as bad as we can. ![]()
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