Sunday 5 February 2012

Flash Profits: One-time event that impacts earnings

Any one-time event that impacts earnings, such as a gain from the sale of an asset or a one-time loss resulting from a catastrophic event or the write-off of a potential debt, should be lifted out of the earnings figures and set to one side.

These occurrences should be recognized for what they are and judged accordingly.  They are in no way indicative of the outlook for future earnings.

A one-time sale of assets tends to make overall corporate profits look better in the year it occurs.  Yet the sale decreases the total assets of the company.  There is no real gain.

In an established, well-managed company, daily operations finance themselves with cyclical shortfalls covered by short-term borrowing, so never should a one-time gain be used to cover ordinary expenses.  

There is no real gain from the one-time sale of assets unless the money is used for one of the following:

  • Restore the asset base
  • Reduce debt
  • Contribute substantially to future earnings.

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