When results are released there really are two parts to them. There’s commentary from management about the results: what went right (or wrong in some cases) and a look ahead to what they’re expecting. This is largely opinion, though management are best placed to have an opinion of the company they run.
The second part is the hard numbers and these are facts rather than opinion, but with some T&Cs applied.
First, interim results are not audited, whereas the full-year numbers will be. However, at the time of release the audit process may not have been concluded and then the company will issue a follow-up Sens announcement with corrections or a “no change” statement. The latter means what was published earlier was correct and has been confirmed by the auditor.
The auditor will also ensure the numbers are within the required accounting standard. In the US that’s the generally accepted accounting principles (GAAP) while the rest of the world uses international financial reporting standards (IFRS).
These standards ensure that there is consistency between different sets of results and we all know what is meant when, for example, headline earnings per share (HEPS) is used.
But things can get a bit messy as management teams sometimes stray from using either GAAP or IFRS. US companies will happily say this is a non-GAAP metric and locally we also see variations of HEPS.
If management feel the standards don’t accurately reflect the business growth or prospects, they “adjust” them.
Most often we will see something like normalised HEPS or adjusted HEPS.
Normalised HEPS is usually when certain things have been removed or added to HEPS to better reflect the results, whereas adjusted HEPS is largely the same but with more latitude taken by management.
If you see something that is not straight HEPS you’ll need to go to the footnotes to see what changes have been made to get to that number and you then get to decide if it’s fair.
Straight HEPS will always be shown, so I’ll check that and then see what changes management have made and if I’m happy with their decisions.
What raises huge red flags for me is when management switch between different types of their own styled HEPS or if they simply change how they measure HEPS. Sure, they’ll spin a story about why they changed how they measure, but the real issue is just that, why the change? It is seldom a good news story. More likely they’re trying to bury something that would make the numbers look bad.
A last point: I mentioned checking the notes to the financial statements for details of how the company is using its own version of HEPS. The notes section is usually very dry, but it’s also where many gems are lurking so it’s one area I always examine.
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