June 28, 2016

Ferrellgas Partners’ Economic Reality Is Distorted By GAAP Accounting


Summary

  • Using Adjusted Earnings and Assets, FGP’s Adjusted Return on Assets was 9% in 2015 – almost twice the traditional 5% ROA most financial databases report.
  • This difference is primarily caused by FGP’s $479mn goodwill, $51mn stock-option expenses, and $45mn operating leases, which significantly distort the firm’s economic reality.
  • Also of note is the difference between FGP’s Adjusted Forward Value to Earnings ratio of 18.4x versus the firm’s traditional 27.3x forward P/E.

FGP - PVP

Performance and Valuation Prime™ Chart

Under GAAP, the as-reported financial statements and financial ratios of FGP do not reflect economic reality. The traditional ROA computation understates the company’s profitability by incorrectly including certain items. The distortion of both profitability measures and valuation metrics of FGP are primarily driven by the inclusion of the firm’s goodwill ($479mn), which inflates the firm’s asset base, and by incorrectly expensing stock option payments ($51mn) and operating leases ($45mn), rather than treating them as part of the company’s investments.

After adjusting for similar issues and a host of other GAAP-based miscategorizations, Valens calculates FGP’s Adjusted Return on Assets as 9% in 2015. In contrast, most financial databases show a traditional ROA of only 5%. Additionally, our analysis shows that FGP has an Adjusted Forward P/E of 18.4x, compared to the firm’s traditional forward P/E of 27.3x. The profitability of FGP’s operations and their equity’s true value are therefore not what traditional metrics originally indicate.


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