Did you hear the one about the company which produced an audited balance sheet declaring it had net assets of $351 million when the market valued the stock at $7 billion? Meet global pokies giant Aristocrat Leisure, which had a two-hour annual meeting at Star City Casino yesterday.

The Australian touched on the debate today:

Shareholder activist Stephen Mayne asked at the AGM why the company had a market capitalisation of $7 billion but only reported net cash assets of $350 million. Chairman David Simpson replied that the market capitalisation of Aristocrat was dictated by the market while the net cash assets had been worked out according to the new international accounting standards.

Net cash assets are actually $183 million, and we’re talking a company declaring its total worth is just $351 million – something PwC auditor Ross Gavin signed off on as “a true and fair view” and “free of material mis-statement”.

Cranky Aristocrat chairman David Simpson was right to point to the historical basis of accounting standards. But I then fixed him right up by asking this follow-up question:

Corporate Australia has a long tradition of new CEOs coming in and announcing big write-downs that paint the previous guy black and make him look much better in the future. Witness Malcolm Broomhead at North, Don Mercer at ANZ, Paul Anderson at BHP and Peter Smedley at Mayne. Therefore, in light of the current $7 billion market capitalisation and $351 million in claimed net assets, why on earth did the Aristocrat board and auditor allow its new CEO to write down the company’s assets by $160 million to just $218.6 million in 2003 – a year when it had positive cash flow of $200 million and was valued by the market at a couple of billion?

The best Simpson could do was to say we were discussing the 2005 accounts.

Earlier in the meeting the Aristocrat finance director said he was delighted S&P had yesterday lifted its credit rating to BBB-.

When I pointed out that a company that returned $300 million to shareholders last year and generated free cash of $360 million should have a much higher credit rating, chairman Simpson opined that S&P was “very, very conservative indeed”.

Which is precisely my point. Why produce a balance sheet that massively understates your worth if it means you’re left with a lower credit rating and higher cost of funds?

Why? Well, sin industry companies have long had a tradition of understating their worth because they don’t want regulators or victims of their products (ie problem gamblers) to cotton on to the scale of their bonanza.

Peter Fray

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