Enterprise Products Partners’ Economic Reality Is Severely Distorted By As-Reported Numbers
Summary
- Using Uniform Adjusted Financial Reporting Standards, EPD’s Adjusted ROA was 9% in 2015 – over twice the traditional 4% ROA most financial databases report.
- This difference is primarily caused by EPD’s $5.7bn goodwill and $4.0bn in other intangibles, which significantly distort the firm’s economic reality.
- Also of note is the difference between EPD’s UAFRS-based Forward P/E ratio of 22.9x versus the firm’s traditional forward P/E of only 18.0x.
Performance and Valuation Prime™ Chart
The problem with Generally Accepted Accounting Principles (GAAP) is that they create inconsistencies when comparing one company to another, and when comparing a company to itself from year to year. By making adjustments, we aim to remove the financial statement distortions and miscategorizations of GAAP. Some of these can be automated through consistently applied formulas; however, many must be made manually. Manual adjustments that cannot be automated include mergers and acquisitions accounting, special charges, business impairments, and others. The practice of creating consistent, apples-to-apples comparable measures of financial performance is often considered either tedious or overly complex by even seasoned financial analysts.
Under GAAP, the as-reported financial statements and financial ratios of EPD 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 EPD are primarily driven by the inclusion of the firm’s goodwill ($5.7bn) and other intangibles ($4.0bn), which inflate the firm’s asset base, and by incorrectly expensing operating leases ($104mn).
After adjusting for similar issues and a host of other GAAP-based miscategorizations, Valens calculates EPD’s Adjusted Return on Assets as 9% in 2015. In contrast, most financial databases show a traditional ROA of only 4%. Additionally, our analysis shows that EPD has an Adjusted Forward P/E of 22.9x, compared to the firm’s traditional forward P/E at 18.0x. The profitability of EPD’s operations and their equity’s true value are therefore not what traditional metrics originally indicate.
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