Analysts at investment bank Berenberg reckon pay TV broadcaster Sky (SKY) is engaging in 'accounting alchemy' to artificially boost its numbers.
'After flattering 2016 numbers by reporting a 53-week year – not previously flagged by management – Sky is now moving to take its set-top costs out of EBITDA,' it notes. EBITDA is earnings before interest, tax, depreciation and amortisation.
'The shift to capitalising and depreciating will boost EBITDA and earnings per share in the early years of the new strategy, but depress cash flow due to higher box costs.
'For investors focused on earnings per share, this may be taken as good news, but for those who look to other measures of return, like cash flow, it is negative.'
Cash flow is often the best measure of profitability because, unlike other metrics, it cannot be manipulated.
The company is set to report first quarter results this week (13 Oct) and is due to hold a capital markets day on 20 October.
The latter is drawing plenty of attention because it is extremely rare for Sky to hold such an event.
Berenberg, which reiterates its 'sell' advice and 730p price target, says: 'No-one hosts a capital markets day if they do not have a positive message to tell.
'We understand a key focus may be Germany and the potential for growth, but note that Fox has invested heavily in this asset since 2008, with little to show for it.
'Meanwhile, any mid to long-term earnings per share target is meaningless without knowing the cost and quantum of Premier League rights after 2019.'