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Results for companies with a December year-end are being released thick and fast, swamping investors as they try and digest them all.
It is not a term recognised in International Financial Reporting Standards (IFRS) and so a company can do anything it wants with “normalised” HEPS.
Barclays Africa Group (soon to be changing its name back to Absa Group) used normalised HEPS in its results because of the costs of separating from the UK parent company, Barclays Group.
In its results, Barclays Africa states that normalised earnings “adjusts for the consequences of the separation and better reflects the group’s underlying performance.
“The group will present normalised results for future periods where the financial impact of separation is considered material.”
This statement is true: The separation is a one-off event, even if it is an expensive and a lengthy one.
That said, Absa did a good job of explaining why it was using normalised HEPS, and made it clear what the difference was between the two, going into detail about the expenses incurred and payments made during the process so far.
So an investor gets a clear picture of normal group operations, as well as an accurate view that includes the costs of the separation, allowing us to make an informed decision about the results.
Pharmaceutical group Ascendis Health’s results are another example. It states: “Note: The group is reporting normalised results from continuing operations which have been adjusted for once-off transaction costs in the current and prior financial years.”
In this case, the details are not as clear, with management stating “costs excluded for normalised headline earnings purposes include restructuring costs to streamline, rationalise and structure companies in the group.
It also includes the cost incurred to acquire and integrate the business combinations into the group and the listed environment.”
Again, the company is within its rights. These really are one-off costs and the normalised HEPS actually increase by less than IFRS HEPS if discontinued operations are excluded from the results.
As mentioned earlier, the problem is that “normalised earnings” are essentially whatever management wants them to be.
Reporting normalised earnings is perfectly within a company’s rights as long as IFRS results are also reported – but investors need to know what is meant by the phrase, and must be able to dig into the details to decide whether they’re happy with the logic.
I want to know why a company feels it is important to use normalised earnings, and I also want details on what is being added to or subtracted from IFRS HEPS.
I want consistency on the use of “normalised HEPS”, so that we can compare the years with one another (this is part of the problem: management can change the methodology to calculate normalised HEPS from period to period).
Crucially, ask yourself whether you agree with the logic for using normalised earnings. Companies can release normalised HEPS any way they want, but it is we, the investors, who must decide whether we agree.
This article originally appeared in the 15 March edition of finweek. Buy and download the magazine here.
