The Emperor’s New Clothes is a story about people refusing to acknowledge reality lest they lose standing at court. WeWork Cos Inc.’s prospectus for its initial public offering, published on Wednesday, is a similar tale.

The “hip” office space provider makes huge losses but its individual locations are somehow deemed profitable thanks to flattering accounting adjustments. While there was no mention this time of the company’s “community-adjusted Ebitda,” a much-maligned metric that boosted its profit shamelessly, it came up with an equally problematic “contribution margin” even though that positive figure excludes some hefty corporate operating expenses.

Meanwhile, WeWork’s description of Adam Neumann, its co-founder and chief executive, stops short of claiming he can walk on water, but only just: “Adam is a unique leader who has proven he can simultaneously wear the hats of visionary, operator and innovator, while thriving as a community and culture creator,” it says. That’s a lot of headgear.

Just because Masayoshi Son’s SoftBank entities and other backers believe this company is worth at least $47 billion (or perhaps twice that if the targets of a recent stock incentive plan are any guide) doesn’t just make it so. The reality is that that WeWork operates in a cyclical sector with few barriers to new competitors, and it remains both a corporate governance nightmare and a cash bonfire. Its main listed rival, the U.K.’s IWG Plc, is capitalized at just 3.75 billion pounds ($4.4 billion). And that’s despite it generating more revenue than WeWork and making a profit.

Prospective WeWork investors should channel the spirit of the child in Hans Christian Andersen’s tale and point out that its fabulous garments aren’t all they’re cracked up to be. 

Neumann’s grip on the company is equally troubling as he’ll still control most of the voting rights after the listing. That gives him the power to remove directors and executives who displease him and, of course, to dictate strategy. It’s an unequal relationship too. Despite his apparent importance he doesn’t have an employment contract, meaning he could leave at any time in theory.

Various eye-opening “related-party” transactions (in this case, WeWork taking out leases on buildings owned by Neumann) are declared, as my colleague Shira Ovide points out. Meanwhile, three of the banks underwriting the IPO have extended Neumann a $500 million credit line secured against his shares. If he were ever unable to satisfy a margin call, the lenders could seize and sell stock, the prospectus notes, putting downward pressure on the share price. In other words, the interests of Neumann and other investors aren’t necessarily aligned.

But how can one put a value on the shares anyway? The company doesn’t plan on paying dividends, which is hardly surprising in view of the $2.5 billion of cash it burned through in the first six months of this year. And you can’t easily apply a multiple of earnings to estimate its value because WeWork doesn’t have any of those either – and won’t do for the foreseeable future.

Net losses, which totaled $1.6 billion in 2018, “may increase as a percentage of revenue in the near term and will continue to grow on an absolute basis,” the company said, ominously.

This all matters because WeWork has a growing pile of debt and $47 billion of mostly long-term lease obligations. Unlike a WeWork membership, those leases can’t be cancelled easily. Revenue that’s been committed covers less than one-tenth of that total obligation.

Doubtless aware that this huge financial commitment on leases is perhaps one of the biggest flaws in its investment case, WeWork dedicated a part of the prospectus to explaining why it should still be okay even if there’s a recession.

It’s plausible that during an economic downturn some businesses will want to use the cheap, flexible office space that WeWork provides. Equally plausible, though, is that companies will go bust or no longer need as much space. Enterprise customers – big firms that use external office space for staffing overspill – might also chose to bring more of their employees back in-house, notes the Fitch ratings agency.

With bond markets indicating that a recession may well be on the horizon, one wonders why investors are being asked to take a punt on WeWork before we really know how the firm would cope. What’s the rush?

Earlier this year SoftBank’s Vision Fund was reported to have passed up the chance to pour even more money into WeWork. Public market investors should ask themselves if and why they’re being invited to fill the gap.

In fairness, WeWork has an impressive brand and its membership has doubled every year since 2014. But that growth has been enabled by unlimited supplies of capital and not having to worry about the bottom line. Warren Buffett mused famously that you only discover who’s swimming naked when the tide goes out. WeWork investors might be about to find out.

To contact the author of this story: Chris Bryant at cbryant32@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

©2019 Bloomberg L.P.