A firm that calls itself a “group of financial detectives” has accused Smith & Nephew of using “aggressive accounting techniques” to boost its profit margins.
Dragoneye, a London-based independent research firm for short-sellers, has questioned whether Smith & Nephew deferred costs in an inappropriate manner and failed to properly account for stock write-offs.
Dragoneye calculated that these accounting methods have inflated Smith & Nephew’s trading profit margin by 1.7 percentage point, from 17.5 percent last year. The profitability of Smith & Nephew is linked to 40% of Deepak Nath’s annual bonus.
Deepak Nath tries to restore trust in Smith & Nephew following a period of inconsistent trading, and executive churn.
Smith & Nephew stated that the report was inaccurate and it was “absolutely” not true that the company had inflated their profit margins by using aggressive accounting methods. Since the report’s publication on October 1, its shares have dropped by 6.1%.
Nath is working to restore investor confidence in Smith & Nephew after a period in which the company’s trading was inconsistent and executives were frequently changing.
His task could be complicated by Cevian Capital. The activist investor has a stake of 5 percent. Cevian Capital, according to sources familiar with its thinking, wants deeper cost cuts and a reorganisation Smith & Nephew divisions in order to increase transparency and accountability.
The research carried out by Dragoneye by Julian Hull (a former short-seller ShadowFall researcher) shows that Smith & Nephew’s inventory has reached its highest level for two decades.
Smith & Nephew has also seen its inventory write-offs fall to their lowest level since 2019. Dragoneye estimates that last year’s profit would have fallen by $60 million (£45million) if the write-offs were maintained at their three-year-average.
Smith & Nephew stated that it was seeking to better align production with demand and that lower inventories charges were intended benefits. The policy of the company on inventory charges has not been changed.
Dragoneye questions the increase in value of assets in construction in Smith & Nephew’s intangible asset declaration. They increased from $13 millions in 2018 to $178million last year.
Assets only depreciate once they have been used. Dragoneye claims that Smith & Nephew was able to defer the amortisation cost, resulting in a 100 basis points increase to their trading profit margin when compared to last year’s amortisation rate.
Smith & Nephew has denied the claim that it deferred amortisation and said that the report had “cherry-picked” certain assets to create a false picture.
According to S&P Global, short interest (a proxy for selling shares on the cheap) is at 3.3 percent of Smith & Nephew’s outstanding stock. AKO Capital is a hedge-fund known for its detailed fundamental analysis.
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