Normally I'd bite my tongue in these situations. What gets me here is investors walking away from this experience learning exactly the wrong lessons. So if this helps just *one* person get a better understanding of the underlying issues, then this was a post worth making.
The most important thing in a purchased debt ledger business for an investor to understand is how the PDL assets are written down as they are consumed (that is, collected or written off as un-collectable). This affects every single line in the profit and loss statement *including* the revenue number. Collections - Amortisation / fair-value adjustment = Revenue. The importance is similar to how bad debt is modeled for a lender.
The PDL value adjustments follow how management internally model the expected collections from the remaining uncollected assets. There is no official standard for this; it's much more art than science. A lot of the metrics used for these calculations are not governed by any accounting standards. Management, and indeed the company's internal modellers and analysts, have a lot of creative control over the process. It only gets called out by the auditors if it reaches the upper stratospheres of believability - normally after an extended period of pushing the boundaries.
How is an investor to know? You have to put in the work. If you're not willing to put in the work, don't invest in any companies involved with financial modelling as an input of reported profits - go look at JB Hifi or something.
A key metric in this case was the ratio between "collections" and the "PDL carrying value". If you can't get the collections number, find a way to back solve it. Comparing it with Australian and international peers will give you an idea how aggressive or conservative a company's amortisation / fair-value adjustment modelling ("creativity") is. Track it over a number of years to see if it's gotten better or worse. If it's outside the range of the peers, without a scintillating-ly compelling reason, run! If the collections are falling but the assets are growing, run!
The signs were there. The seeds were sown many years ago - "The fall of Rome wasn't built in a day". Just don't expect to get a hint by taking reported figures (revenue, profit, NTA, etc) as gospel and lapping up the narrative from the investor presentations.
CLH Price at posting:
21.5¢ Sentiment: None Disclosure: Not Held
