Warnings follow difficult conditions

PROFIT warnings by public companies have jumped 21 per cent in the past six months and have more than doubled com-pared with the previous period in 2000.

A report into profit warnings by Ernst & Young indicates that 81 Australian companies issued profit warnings during the last half – eight coming from WA.

Foundation Health Care, Austrim Nylex, Alcoa, Imdex Ltd, WA Newspaper Holdings, Brandrill, Aurora Gold and Orbital Engine Company all issued warnings, with most citing difficult trading conditions as a reason for the warning.

The highest number of profit warnings in the period came from the manufacturing and food industries, followed by the finance industry.

The report says the rise in profit warnings was higher than expected and was influenced by the September 11 terrorist attacks.

Almost 30 per cent of companies cited September 11 as having a key impact on profitability.

“It is clear that the earnings performance of a number of Australian companies has been hurt by a number of corporate collapses in the past year, notably the collapse of telecommuni-cations company One.Tel, airline Ansett and insurance group HIH,” the report says.

Ernst & Young corporate finance restructuring practice WA principal Brian McMaster said the fact that a company had issued a profit warning did not necessarily mean it was no longer fundamentally sound.

“From an investor’s perspective the message is that, when a profit warning is made, it should raise a red flag. It is a good opportunity to have another look at the company and ask why it’s not meeting expectations,” Mr McMaster said.

“But profit warnings are not the be-all to end-all. It doesn’t necessarily mean the end of the company.”

He is expecting profit warnings to ease back to around 70 in the current six-month period as the market settles after recent international turbulence.

“We think it’s been tumultuous in the past few months but things should now start to stabilise,” Mr McMaster said.

In a recent address to the Australian Shareholders Association, RSM Bird Cameron business development manager Geoff Peate warned investors not to put too much credence into company reports, because they could be construed in a way that hid the true financial position of the company.

Mr Peate said the new accounting standards called the “trilogy”, which allowed for more flexible reporting, had made it even more difficult for shareholders, and made it easier for companies to hide their poor performance.

“Where I start to see the word flexibility I see the word ‘creative’ accounting,” he said.

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