Friday, September 20, 2013

The Economist on Company Size: World's Bigggest Yawn

Honestly, I don't want to give up on The Economist,  but sometimes they seem to be asking for it. Case in point, this week's piece on "The World's Biggest Firms," which, so far as I can tell, is about as much use as the average Buzzfeed Listicle.    That is: they don't lift a finger to explain their methodology but so far as I can tell this is crude market cap: share price times number of shares outstanding.  Which is a  crude, lazy, and at best deeply misleading measure of value.

Yes, I know that everybody uses market cap (except they don't)--but this is the big E, frevvins sakes, the preening cock-o'-the-walk among finance news magazines (so they tell us), taking great pride in its (supposed ) capacity to explain complicated ideas simply.  So would it have  been all that hard to measure value of debt as well as equity--to recognize that everything on the right hand side of the balance sheet is a claim against everything on the lefthand side, and that payments to debt are returns to capital,  not just an expense?

I want to say, "sheesh, I thought everybody knew this by now."  Well, yes and no.  Granted that accountants still talk about "net income" after payments to debt (and, yes,  before returns to equity).  But this is just institutional drag; I really think they know better, and one of these days they' get around to clarifying.  Meanwhile, anyone who has ever sharpied the word "EBIT' on the back of a cocktail napkin know that book accounting is only the beginning, not the end in measurement of value.  And, oh yes, the bankersL: I admit they still talk about "capital" as = "equity," but we have abundant evidence that bankers don't understand debt anyway, now don't we?

And while they were at it, would it have killed them to make another point that they surely understand about market cap--i.e. that is the purest, the most glaring, the most unadulterated fiction?  In the sense that, no company ever (except for the sheerest coincidence) sold for share price times shares outstanding?

Here's a comment I posted over at The Economist website, making essentially the same point.

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