Decremental? Don’t go there

As a word lover, I’m always intrigued by the latest buzzwords, names for new technological or social phenomena, and so on. So here comes The Wall Street Journal with “Decremental? Fitting Word for Ugly Times.” The story helped start Monday off as a very – well, decremental day for anyone interested in the market.

“Decremental,” it seems, has been popping up a lot in sell-side reports (and now the WSJ) as an adjective to describe the impact of earnings or sales going down:

Decremental is a real word; it’s a negative increment, or the linguistic inverse of incremental. …

The word ultimately translates into shrinking earnings power, which is a big factor in stock-market declines that have driven share prices to their lowest level in more than a decade.

In good times, when sales are going up, the WSJ reminds us that operating leverage causes profits to rise even more because “incremental” revenues are going up faster than costs. But in bad times, as sales decline and costs remain sticky, earnings can fall off a cliff. Some analysts are labeling this “decremental margin.”

[Deutsche Bank analyst Peter Reilly] calls it ‘an ugly word,’ and says it’s ‘just a fancy way’ of measuring the degree to which earnings decline with each dollar of sales lost. ‘If a company sells $100 less widgets and profit falls by $20, then the margin on decremental sales is 20%,’ he says.

OK, as a humble word guy laboring in the trenches, who am I to argue with high-priced talent on Wall Street or in the City of London? They presumably need fancy words to add flair to otherwise bleak reports.

But how about a company communicating its results to investors? Don’t go there, I would suggest. Ordinary words are far better than the likes of “decremental.” If I’m a shareholder, the company should tell me sales are “lower,” margins “declined” or earnings are “down.” They should explain that sales dropped but fixed costs couldn’t be cut that fast. I may not be happy, but at least I’ll understand.

And creating understanding, after all, is the goal of investor relations.


Tags: , ,

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: