DISCLAIMER: WE MAKE NO REPRESENTATION AS TO THE MEANING OF ANY FINANCIAL INDEX QUOTED

People love numbers. Numbers are objective, informative (if accurate), concise and universal. They cut to the chase and tell us instantly what we need to know, not what we want to hear. As the proverbial saying goes, "numbers don't lie." Or do they?

Based solely on an art market analyst's measurements of the Return of Capital Employed (RoCE) for 56 contemporary galleries in the UK, an article in The Art Newspaper reported  "solid long-term returns" for different segments of the art market. As such, the article is representative of the kind of quantitative financial reporting that purports to tell the reader the bottomline when in fact it tells him very little at all. Simply regurgitating a single analyst's calculations, the article fails to break-down the financial index into its component parts to figure out exactly what the numbers mean and exactly how much they really tell us. Well, it made a small attempt along the lines of "RoCE is a frequently used measure of profitability that takes into account the amount invested into a company." Let's dig a little deeper...

Investopedia.com defines RoCE along similar lines as "a ratio that indicates the efficiency and profitability of a company's capital investments." But it goes on. RoCE is "calculated as EBIT / Total Assets - Current Liabilities." EBIT is earnings before interest and tax and current liabilities refers to a company's debt obligations falling due within one year. Another way of thinking about it is pre-tax operating income divided by net assets or how many dollars a company gets out of each dollar's-worth of assets held. Access to the financial accounts of galleries is notoriously hard to obtain but I presume that a gallery's assets are the gallery itself if it owns it and its inventory -- the art it holds on consignment for artists until it is sold. Title usually remains with the artist but galleries make their profits by selling artworks on behalf of artists so again I presume that for accounting purposes the artworks consigned constitute inventory. If you snoop a little around the backroom of a gallery, you are likely to see rows and rows of paintings stacked up against the walls. In order to calculate the RoCE, it is the book value of the paintings that is used in the denominator. This means that as the assets are depreciated (i.e. their book value goes down), the RoCE increases. I don't know whether galleries (or their accountants) depreciate artworks as inventory but even if they do not, how one comes up with a relatively accurate book value to assign to the artworks is unclear to me. Furthermore, RoCE doesn't take into account inflation which increases revenues (the numerator) but does not affect the book value of assets (the denominator) with the artificial result of RoCE increasing.

I'm getting slightly sidetracked here as this is, after all, intended to befundamentally an art law blog (albeit, commercial art law). However, when people make purely quantitative statements suggesting these are indicative of some underlying trend or reality, the schewed reality painted needs to be heavily tempered. Indices can be helpful but they are only one more way of looking at something far more nuanced and complex that simply cannot be reduced to numbers. It's like when people say they made X amount of money from a re-sale of a painting by simply subtracting the original purchase price from the re-sale price, completely ignoring the other crucially significant numbers: transaction costs (fees, artist's resale rights (if any), taxes, transportation), conservation costs (framing/ installation, preservation, insurance, and, in some cases, restoration and security) and transaction costs, again (seller's/dealer's fee, transport, taxes). Depending on your choice of numbers, you'll come to one conclusion or another about the profitability of the very same transaction.