(Apr 1): If it walks like a duck, quacks like a duck, looks like a duck, swims like a duck, then it probably is a duck. Why are companies so intent on classifying perpetual securities (perps) as equity, instead of what they really are: financial liabilities or debts? Looking at a simplified balance sheet and profit-and-loss statement of a hypothetical company (see Table 1) provides the reason.
With perps recognised as equity, the gearing of this company is 5%, giving the impression that it has almost no debts and is therefore totally safe. In reality, it would be a hugely leveraged and risky company at 567% gearing.
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