Value Investor: The good news about writedowns

Earnings are not necessarily a proxy for value and - as Coca-Cola Amatil and Pacific Brands demonstrate - asset writedowns can sometimes increase profitability and intrinsic share value.

While the market responds negatively to poor earnings results, it does not mean profitability and intrinsic value will also fall. In fact, asset writedowns can improve profitability metrics, such as return-on-equity.

Generally, asset writedowns are negative in that they indicate lower sustainable earnings. However, in certain cases, they can remove underperforming assets from the balance sheet and actually increase return-on-equity and intrinsic value.



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