You will be able to reconcile a company's adjusted profit to its reported profit and judge each adjustment.
Larkspur's results announcement leads with "core net profit up 38% to S$47 million". Three pages later, the income statement shows net profit of S$48 million, and a footnote explains that core profit excludes a gain on selling a property, share-based pay and restructuring costs. Marcus has seen headlines like this for years without asking what was taken out. This lesson shows how to check, and how to decide which adjustments you accept.
Every figure here is made up. The habit is real, and it works the same way for SGX companies' core profit and US companies' non-GAAP earnings.
Accounting standards define net profit. Companies may show other measures alongside it, under names such as core profit, underlying earnings, adjusted EBITDA or non-GAAP earnings per share. In the US, SEC rules require the standard figure to be shown with at least equal prominence and any non-GAAP measure to be reconciled to it.
The usual items removed are restructuring costs, impairments, gains or losses on selling assets, acquisition costs, amortisation of intangible assets bought in acquisitions, and share-based pay. Management's case is that these items are one-off or non-cash and distort the view of how the business is running.
Sometimes that's fair. A gain on selling a property is a one-off, and including it flatters profit for one year. Removing it gives a better base for forecasting. Often it isn't fair, and the test is simple.
Ask of each adjustment: does this happen every year? If it does, it's a cost of running the business, whatever name it carries.
Restructuring is the common case. A company that restructures once in a decade has a one-off. A company that books restructuring charges every year is simply paying to keep reshaping itself, and investors who strip the charge out every year are pretending a real cost doesn't exist. The same goes for impairments at serial acquirers, which tend to recur when past deals keep disappointing.
Larkspur's announcements over three years showed restructuring charges of S$3 million, S$2 million and S$3 million, each described as relating to "efficiency initiatives". Three years in a row is a pattern. Marcus put them back.
Share-based pay is the cost of shares and options granted to employees. Companies often exclude it from adjusted profit because no cash leaves the business.
But it's paid with something that belongs to you. New shares issued to employees leave each existing share with a smaller slice of the company, and if the company buys shares back to offset that dilution, it spends real cash doing so, so shareholders bear the cost one way or the other. Warren Buffett has made this point in Berkshire Hathaway's shareholder letters for decades: if share-based pay isn't an expense, what is it?
For Larkspur, share-based pay was S$2 million, small against its profit. For many US technology companies it's far larger. Marcus's US chip designer, with made-up figures, reported net profit of US$800 million and adjusted net profit of US$1,170 million. The gap was US$300 million of share-based pay, US$120 million of amortisation on acquired intangibles and US$40 million of restructuring, minus US$90 million for the tax effect of those items. Put back the share-based pay and restructuring, and the honest figure sits much closer to the reported one than to the headline.
The reconciliation table is the tool. US companies publish it in the results press release and often in the 10-K. SGX companies usually show it in the results announcement or the operating review. Work from it rather than building your own from scratch.
Lay out three years side by side, from reported profit to adjusted profit, one line per adjustment. Then mark each line fair or not, with a reason.
For Larkspur's latest year, the table ran: reported net profit S$48 million, minus the S$6 million gain on the property sale, plus S$2 million share-based pay, plus S$3 million restructuring, which comes to core net profit of S$47 million. Marcus marked the property gain fair to remove, because it won't recur. He marked share-based pay and restructuring not fair, because both recur and both cost shareholders. His own figure was S$48 million minus S$6 million: S$42 million of underlying profit, or 14 cents a share on 300 million shares.
That's S$5 million, about 11%, below management's core profit. The S$42 million is the figure that goes into the model in module 7, because forecasting from S$47 million would build a cost the business keeps paying out of the forecast.
One more check is quick and telling. Look at which way the adjustments go over several years. If every adjustment pushes adjusted profit above reported profit, year after year, management is choosing its adjustments to look better. Honest adjustments go both ways: one-off gains come out as readily as one-off losses. Larkspur removed its property gain, which counts in its favour. Its recurring restructuring didn't.
For the activity, find the reconciliation table for your chosen company's last three years, list each adjustment, and mark it fair or not with a one-line reason.
Reconcile your chosen company's adjusted profit to reported profit for three years and mark each adjustment as fair or not.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).