Invent a new accounting method, apply to everything - profit!

We have a little outbreak here of people solving the Underpants Gnome problem. It’s all very well desiring to make money but it is necessary to have a plan about doing so. The solution here is to invent some new - and absurd - accounting method, apply it to ever more areas of the economy, then profit by charging political actors for the reports that show this new measure in all its glory.

Today’s example of this is the horror - The Horror! - of private equity investing in child care.

The Guardian and the JRF analysed the annual accounts of the 43 largest childcare providers in England for which relevant information is available, which represent 13% of the nursery places.

….

The analysis also found that the cost of servicing debts is higher in providers backed by investment companies, with interest payments and other fees associated with having borrowed money representing a quarter of their income. In comparison, debt repayments represent on average 6% in other for-profit nurseries and 2% in non-profits.

…

The companies backed by private equity or investment firms covered by the analysis – which represent some of England’s largest childcare providers – reported average profits equivalent to 22% of their turnover over the five-year period between 2018 and 2022.

This is twice the 11% reported by other private providers not backed by investment companies, and more than seven times the 3% reported by the non-profit companies analysed.

Ah, yes, now we recognise this. For we saw it - have been seeing it for some years in fact - with reference to childrens’ homes, not mere child care.

What is being done here is, umm, most odd as an accounting method. For the analysis looks at “profits” as being EBITDA margin. Earnings before interest, taxation, depreciation and amortisation. This is a measure that has its uses, sure it does. But it’s useful as a measure of the operating cashflow of an organisation before it starts to service its capital costs - that interest, amortisation and so on. But using it as a measure of “profits” is wrong, conceptually wrong.

But by doing this it is possible to claim two wildly contradictory things. Both that vast profits are being made and also that the debt piles are so high as to call into question the viability of the business model. Those with even a vague grasp of business will note that vast profits mean debt burdens are not a problem, or equally, that vast debt burdens mean that not much profit is being made. It’s only possible to claim the wrong pair of that quartet - high profits and also dangerous debt - by entirely misusing EBITDA as a measure. Firmly grasping the wrong end of that ordure encrusted stick that is. Then stirring.

Now, true, this “analysis” was done by Trinava Consulting, which is a different company from Revolution Consulting which did the care homes “work”. But then as Adam Smith himself pointed out, once someone does solve the “?” in the Underpants Gnome problem then other capitalists will quickly follow suit. For there is money to be made.

Which really only leaves the one final problem. Who is it being exploited by capitalism here? Is it the likes of The Guardian who seem to believe this? Or is it us out here who are expected to believe this dreck?