Statutory, Reported, Basic, Underlying and Adjusted

29th Mar '18 by matylda

7 comments 6802 reads

In the interests of sharing and learning from the community...

Being a simple investor I typically scan Revenue, Profits and EPS as a first port of call (especially when looking at results). I prefer, of course, to see, as I guess most others do, decent all round growth.

Revenue

This one is usually OK as it's usually reported “as it is”.

Pre-Tax Profit and EPS though

Can be a completely different kettle of fish and I was wondering if anyone had a rule of thumb on this.

There's so many variations...

- Statutory

- Reported

- Basic

- Underlying

- Adjusted

And of course there’s also Adjusted Basic, Reported Basic, Underlying Adjusted Basic, etc.

Query

I usually go for first figure using the term, based on this priority - Underlying, Adjusted, Statutory, Reported, Basic.

Would really appreciate anyone (with much more accounting knowledge than me (very little)) having any thoughts on this matter.

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JohnEustace

29th Mar '18

I take the view that Underlying Adjusted Basic etc = Made Up and keep looking to see if they are producing any actual cash.
I am no accountant but I do know that profit can be a flexible number, cash less so.

bwakem

In most cases I just look for statutory. Everything else is just made up. If it's 'adjusted' then you need to look at the adjustments and decide what the real profit is for yourself.

ADY

I tend to try to match up Cashflow per share and Earnings per share from Slater's Zulu Principle, to give credibility to the profit figure. If they aren't reconcilable it's an avoid

pgs501

From an EPS standpoint to me you have to use diluted if it is stated (if it is not I think it means there are no options, warrants etc.). This takes all the stock options etc. into account and gives a larger number of shares the earnings is split between. I would argue that this is the true number of shares and how much earnings your shares actually get.

I also find it instructive to look at the difference between basic and diluted EPS and basic; if this is really large I would like to find out what this is from and is a large amount of the company being given away to directors for free.

I also agree with the check from Earnings to Cash, or checking for increases in debtors, regarding earnings quality checks.

the0ni0nking

The boring accountant in me generally means I'd trawl through to find diluted EPS rather than simply take account of the headline figures that the marketing department probably thought it best to put at the top!

Take for example 1pm (LON:OPM) and their interim results announced in January.

Initial headline in the announcement states:
"Revenue and Profits both up by 70%"

It then goes on to state within the financial highlights:
"Group revenue increased 74% to £13.9m (H1 2016/17: £8.0m), including organic growth of 23%"
"Group profit before tax and exceptional items increased 77% to £3.6m (H1 2016/17: £2.0m), including organic growth of 34%"

So far so good - significant growth because of an acquisition but also strong organic growth headlined.

Then it all starts to unwind a bit albeit in fairness to them this is still included in the financial headlines:

"Basic earnings per share increased 4.9% to 3.23 pence (H1 2016/17: 3.08 pence)"

But that's basic earnings, what about fully diluted earnings. For that you need to go all the way either to the very bottom of the income statement or to Note 6 in the Accounts. Furthermore, where this is provided they do not provide a % calculation as to its movement. I wonder why.

Diluted EPS actually fell to 2.72p from 2.84p - a decline of c4%.

All in all rather disappointing - and not what you would have expected from reading the initial narrative and headlines.

Cheers,
0inK

Gromley

I don't think it's quite that complicated is it? As some of the terms mean the same as each other surely.

"Statutory" and "Reported" are the same thing and they mean the results as stated in the official account.

Similarly "Underlying" & "Adjusted" are the same thing as the adjustments in the latter are made (allegedly) to show the "underlying" position.

And then basic refers to the per share figures ; basic meaning divided by the current number of issued shares, diluted being divided by the potential number of shares (including options, warrants etc)

The underlying figures should be the best figures to see how performance is going and how it might go in the future - but you do need to do a sanity check on what the adjustments actually are, some companies have a nasty habit of adjusting for things that happen every year.

Revenue
This one is usually OK as it's usually reported “as it is”

But is that LFL revenue, revenue from continuing ops or what?

I do agree with others here that a reconciliation of profits to cash is also a useful test. (But can any of the accountants here explain to me why Cashflow statements start with "cashflow from operations" at the top and that we than have to delve deep into the Notes section to find the reconciliation from profit to this cashflow from operations?)

But even cash is not always a transparent measure. I used work for a business where at the end of each reporting period we would delay payments to certain key suppliers and encourage certain key customers to pay promptly. As we did this every reporting period end it made little difference to the period on period figures, although it did make the business look more cash rich than was really the case. Such window dressing is quite common as I understand it, so a test here is to look at whether interest costs are consistent with the stated level of debt.

Imagine a company that does not routinely "window dress" their balance sheet, if they had a problem that they wanted to obscure then a bit of window dressing might well do the trick.

You see, I told you it was all simple. (Just buy the stock which will have a higher shareprice in the future than they do now).

TS23

I think that, whichever definition you use, the key thing is to compare like for like. This is particularly the case where you are comparing last year's actual, say, EPS with next year's broker forecast EPS. The two are often calculated in a different way so can result in overstated or understated growth being shown.

If I am looking for a share with projected EPS growth I no longer rely on the growth between the latest actual and year 1 forecast as I have found this to be misleading. I now look at forecast year 1 versus forecast year 2 as at least these should be on the same basis (also it should give a view on the longer-term growth expectations for the stock).

Statutory, Reported, Basic, Underlying and Adjusted

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Matylda

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