In my random walk down the streets of the FTSE 100 investor web sites, I decided to visit one of the biggest. At first blush, I was impressed by the site. A clean, spare design allowing you to find what you want with a minimum of clutter and prominently featured in the center, a Financial Summary with some impressive looking numbers and graphs. “Aha”, I thought – “lead with your strengths.” The numbers and graphs showed a steady progression of revenues and adjusted operating profit. But if there has been one lesson learned from the Bernie Madoff scandal, it has been to be suspicious of a stair-step progression of profits. Real life tends to be less linear.
Sure enough, when I looked at the numbers a little closer, the profit this company is displaying is Adjusted Operating Profit, which they define as “before amortisation of goodwill and intangibles, profits less losses on the sale of PP&E and exceptional items”. This is not what you would call your normal Net Earnings. In fact there is a term for this type of financial disclosure. It is referred to by sophisticated financial types as “earnings before the bad stuff”.
Being a naturally curious type (some might say cynical) I went looking for the real profit number. You know, the one that companies are required to show as a result of following standard accounting practices. Under U. S. disclosure practices, if you deviate from GAAP accounting standards in presenting information of this type, you are required to prominently disclose the reasons for doing so and provide a reconciliation to GAAP accounting. No such luck here on the main Investor page, so I went to the Financial Results page. No such luck there either, where you are confronted with a segment breakout of financial results, but the line for profits by segment is accompanied by an asterisk telling you that they are referring to – wait for it – “adjusted operating profit”. They even compound the sin on this page by calculating their Margin percentage using the adjusted operating profit number.
In fact, the only disclosure of the actual profit number that I found on the web site was in the Downloads section, where you can access the company’s annual report. You actually have to go back through a number of annual reports to reconstruct the numbers for Reported Profits. When you go through this exercise, you find that results are nowhere near as linear as the company wants you to believe. Reported Profits declined in 2005, 2006 and 2008 from the prior year’s Profits, or, three out of the five years shown.
So the question is, do they really think that investors are that stupid or do they really believe that such things as amortization, selling off parts of the business and restructuring costs don’t count? Either way, as an investor it would make me nervous.
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