Tesco suspends execs as inquiry launched into profit overstatement

IronWolf

Sports Direct's purchase of put options is quite interesting, very unusual for a company to gamble on the share price of another.

tincans

princeofpounds wrote: »

It's an interesting graph, and certainly this has been a problem for Tesco, but it's also somewhat misleading in that, in itself, it is not an indication of a problem. An under-geared company pursuing the same strategy would be applauded.

Not by Terry Smith (Accounting for Growth etc), who used the graph (not his own) in an article in the Financial Times before this debacle.

He made this point;

"To drag the average ROCE down so dramatically it is likely that returns on new investments in those years were not just inadequate, but in some cases negative."

In addition "Tesco was not generating enough cash both to invest and to pay its dividend"

The UK and USA have swallowed the whole increase debt to reduce your weighted average cost of capital ignoring the fact that it increases risk has allowed in this case Tesco to expand into areas that were highly unlikely to succeed (the USA) and are just plain daft (Giraffe, Hoole & Harris)

princeofpounds

Not by Terry Smith (Accounting for Growth etc), who used the graph (not his own) in an article in the Financial Times before this debacle.....

Yes those are all very interesting points, but I think you may have misunderstood what my sentence meant. The hypothetical situation I was referring to has nothing to do with Tesco.

By the way, this:

"To drag the average ROCE down so dramatically it is likely that returns on new investments in those years were not just inadequate, but in some cases negative."

is fundamentally wrong as a theoretical statement. Changes in profitability (net profit being the numerator of ROIC) are not only created by new investments. In fact for most mature businesses changes in profitability are driven primarily by operating conditions for the existing business lines.

So you can infer relatively little about the productivity of new investments from this information (ROIC and EPS) alone.

I am sure that Mr Smith uses other data to inform his interpretation, as I do basically agree with this:

areas that were highly unlikely to succeed (the USA) and are just plain daft (Giraffe, Hoole & Harris)

SunReader

IronWolf wrote: »

Sports Direct's purchase of put options is quite interesting, very unusual for a company to gamble on the share price of another.

Yes, he owns a football club and did a similar gamble on Debenhams too I beleive. An alpha male risk taker I guess.

Either a great time to buy or your last chance to get out - interestingly some of their staff have sold up already, maybe they know something we don't...

James_B.

IronWolf wrote: »

Sports Direct's purchase of put options is quite interesting, very unusual for a company to gamble on the share price of another.

They did not buy a put, they sold one. They are backing a recovery,

chewmylegoff

IronWolf wrote: »

Sports Direct's purchase of put options is quite interesting, very unusual for a company to gamble on the share price of another.

Sports Direct sold put options rather than bought them - I.e. It gets a fixed payment now but risks losing money if the share price falls below whatever the strike price of the options is.

Generali

IronWolf wrote: »

Sports Direct's purchase of put options is quite interesting, very unusual for a company to gamble on the share price of another.

You may have it upside down but you are fundamentally right: it is unusual for a company to make a directional bet like this.

It's interesting that he's selling puts rather than buying calls as both are the same bet in essence.

chewmylegoff

James_B. wrote: »

They did not buy a put, they sold one. They are backing a recovery,

My view is that if they thought the price was going to rise significantly they would have bought call options.

Selling a put means you get cash now but potentially lose a lot more if the price falls significantly; you can't make any extra money from the price rising. Selling puts is therefore what you would do if you believed the price will remain stable, so I'd say Ashley thinks all the bad news is out but there's not much on the upside.

princeofpounds

I'll have to remember if I ever get done for fraud that I'll have to ask for my prosecution to be indefinitely deferred. Would be quite useful.

worldtraveller

princeofpounds wrote: »

I'll have to remember if I ever get done for fraud that I'll have to ask for my prosecution to be indefinitely deferred. Would be quite useful.

Apologies princeofpounds, you were replying to a post I made and had deleted to post elsewhere on MSE (on DT) just before you posted. Here's the original post:

Tesco has been holding secret talks with the Serious Fraud Office (SFO) about a deal to settle a criminal probe into the accounting scandal which last year triggered the biggest crisis in the retailer's history.

Sky News has learnt that the SFO and Tesco have been in discussions about the possibility of signing a deferred prosecution agreement (DPA), which would involve a court-approved deal under which the company would admit wrongdoing but avoid any immediate criminal sanctions.

SKY News