Positive Earnings but Net Loss?

[RickSanchez]

Hi, can someone help me understand this:

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The fintech's announcement comes as Afterpay announced its FY18 results, displaying a FY18 earnings figure of $33.8 million, and revenue of $142.3 million, up 390 per cent on FY17.

Afterpay recorded a full year net loss after tax of $9 million, an improvement of 7 per cent on FY17. A portion of this loss can be attributed to costs associated with Afterpay's 2017 merger with Touch Corp.
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My understanding is that Earnings = Net income = Profit (all synonyms). It is also my understanding that net income is after tax. If a company has a net income of $33.8 million, how can they have at the same time a net loss of $9 million?

+$33.8m != -$9m

Which part am I missing there? Is there some merger expenses added after net income? How would that be net income if there are still expenses to add to it?

 

[MarketMatters]

EBITDA (excl significant items) was $34m and Net Profit after tax was ($9M)

 

[RickSanchez]

EBITDA (excl significant items) was $34m and Net Profit after tax was ($9M)

So earnings are always EBITDA and therefore not the same as net profit. Am i getting this right?

 

[luutzu]

So earnings are always EBITDA and therefore not the same as net profit. Am i getting this right?

As Buffett once says, EBITDA is one of those earnings where management wants you to ignore all the bad stuff. 'cause if you wish the bad stuff to go away, it's really good

Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA.

So if the company doesn't pay any interest, doesn't pay tax, don't need to fix or maintaine buildings and the hardwares... then all the earnings belong to shareholders.

Quoting Buffett again... in the real world, you do pay interests, taxes... well, maybe not taxes...


So beware of businesses that touts these imaginary numbers in their presentation. It almost always indicate poor performance.

Take a look and see what portion of the ITDA are "one-offs". So if it doesn't owe any debt, the I doesn't matter; if it doesn't make any money, the T doesn't matter; if its assets are mainly intangibles, the D n A don't matter either.

But then if those don't matter... the company soon enough become no matter at all.

 

[RickSanchez]

As Buffett once says, EBITDA is one of those earnings where management wants you to ignore all the bad stuff. 'cause if you wish the bad stuff to go away, it's really good

Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA.

So if the company doesn't pay any interest, doesn't pay tax, don't need to fix or maintaine buildings and the hardwares... then all the earnings belong to shareholders.

Quoting Buffett again... in the real world, you do pay interests, taxes... well, maybe not taxes...


So beware of businesses that touts these imaginary numbers in their presentation. It almost always indicate poor performance.

Take a look and see what portion of the ITDA are "one-offs". So if it doesn't owe any debt, the I doesn't matter; if it doesn't make any money, the T doesn't matter; if its assets are mainly intangibles, the D n A don't matter either.

But then if those don't matter... the company soon enough become no matter at all.

Great explanation, I appreciate the "what it means" bits a lot.

 

[MarketMatters]

Just be mindful that tech companies often trade at high PE multiples (Price/Earnings) and many ignore the fact that the company is running a net loss in view of the long term goal. Examples include Amazon which didn't make a profit for 14 years as it engaged in its massive expansion plan.

 

[RickSanchez]

Noted thanks

 

[luutzu]

Just be mindful that tech companies often trade at high PE multiples (Price/Earnings) and many ignore the fact that the company is running a net loss in view of the long term goal. Examples include Amazon which didn't make a profit for 14 years as it engaged in its massive expansion plan.

High PE indicates companies that (better) grow (or else shareholders will be stuffed).

But that's not fair, given enough time and money, a company or two will gain market share. With market share, state, local, national gov't will start to take their phone calls.

With phone calls, subsidies and incentives will start to flow. Workers exploitation starts to be ignored... then voila, you became another trillion dollar corporation with workers who literally can't take a pizz while the CEO dream of inter-planetary travels (using Pentagon funded space and military subsidies)

 

[MarketMatters]

So true!

 

[luutzu]

Noted thanks

Also look at its cash flows, especially operating cash.

Depends on the nature of the business, its various assets/capital equipment... i.e. operating cash flow dn't take into account these real (eventual) spent on a year by year basis... So take things like that into account when interpreting the operating cash... But

In general, cash tells more about a business than the reported earnings. Earnings, with tax codes and various loopholes, accounting definition of what's expense and what's imaginary... it leave way too much room for management to mislead their shareholders.

It also leave a lot of room for good business to, no mislead but... hmm... legally minimise tax?... you'll often find that a good business generally report lower profit than the actual cash exchange from operation.

Cash coming in is real. Earnings are often what you tell the taxman you're making [or not making].

 

[systematic]

So earnings are always EBITDA and therefore not the same as net profit. Am i getting this right?

(emphasis mine)

I think you're getting stuck on terminology.

You're trying to pin the term 'earnings' down to an item on the income statement. But 'earnings' is just a term - there are various types of 'earnings'. 'Profits' or 'Income' could also be used as terms to mean the same thing.

So, you will see the term earnings (or profit or income) used to describe different income statement line items, and it needs a word before it to tell you what type of earnings (or profit) it is. Is it gross earnings? operating income? net operating income after tax? net income? net income but excluding extraordinaries? etc.

When you read about earnings, often it is (just as you expected) net earnings. But obviously sometimes (i.e. in the example you came across) they mean something else (in this case, apparently EBITDA).

 

[RickSanchez]

(emphasis mine)

I think you're getting stuck on terminology.

You're trying to pin the term 'earnings' down to an item on the income statement. But 'earnings' is just a term - there are various types of 'earnings'. 'Profits' or 'Income' could also be used as terms to mean the same thing.

So, you will see the term earnings (or profit or income) used to describe different income statement line items, and it needs a word before it to tell you what type of earnings (or profit) it is. Is it gross earnings? operating income? net operating income after tax? net income? net income but excluding extraordinaries? etc.

When you read about earnings, often it is (just as you expected) net earnings. But obviously sometimes (i.e. in the example you came across) they mean something else (in this case, apparently EBITDA).

That makes sense. So if I get this right:

Income = Earnings = Profits = Revenue (all synonyms of money inbound).

And they can all be used this way:

Net income, Gross Income, Net Revenue, Gross earnings, Net earnings, Earnings before xyz, Gross profit, net profit, and so on ... what matter is the prefix used to qualify them.

Am I getting this right?
Why isn't that standard and enforced? Why are people who report allowed to say things like "income for this year was xyz" ... that doesn't tell us which type of income... is it mostly an atempt to mislead people who don't understand accounting terms?

 

[Mr Bear]

I prefer Charlie Munger’s explanation of EBITDA, he said they should be referred to as SH$T earnings. He also said sell when a company has been quoting net profit in annual reports and suddenly switches to EBITDA. Once I started reading reports with the EBITDA marketing in mind it was interesting to watch the companies performance that do this..

 

[McLovin]

Income = Earnings = Profits = Revenue (all synonyms of money inbound).

No.

The first three are synonyms. NB be careful when companies refer to operating income as this is a synonym for EBIT, ie how profitable the business is without taking into account how it's financed.

Revenue is sales.

Startups tend to run unprofitable for a while. In Australia, there is a tendency of investors to want to get to breakeven as quickly as possible. In the US they tend to take a longer view (rightly or wrongly) and want the business to build massive scale without worrying about short term profit targets. (I deal with a fair few start-ups, if you want to know why Australia struggles to have a start-up industry that's a big part of the problem)

 

[luutzu]

That makes sense. So if I get this right:

Income = Earnings = Profits = Revenue (all synonyms of money inbound).

And they can all be used this way:

Net income, Gross Income, Net Revenue, Gross earnings, Net earnings, Earnings before xyz, Gross profit, net profit, and so on ... what matter is the prefix used to qualify them.

Am I getting this right?
Why isn't that standard and enforced? Why are people who report allowed to say things like "income for this year was xyz" ... that doesn't tell us which type of income... is it mostly an atempt to mislead people who don't understand accounting terms?

It's not management's job to tell you annoying little "investors" anything. They're just forced to give a briefing twice a year, and hope no analyst was awake so they can slide through and get that bonus.

Seriously though, if you rely on management to tell you how the business is doing, you're already in trouble.

As to the various definition of earnings and profit... it's not really an attempt to deceive... more of an attempt to refine the message.

I mean, even "net profit" as the accountant and the tax office define it might not be real profit. And that's before any PR people getting involved with the messaging.

For example, if business is bad enough, and if the incentive is there, line managers, CFO etc., can relax their credit policy - such as selling to anyone they can find; extending the repayment terms; offering cash-back etc. etc.

Such "marketing" and policies tend to result in high(er) sales volumes, more profit to the bottom line... for that reporting season, maybe another, then another... depends on the size of the business.

But if you sell to people on credit and they can't pay it when they need to... the guy that now have your job is stuffed.

So look at the history of the business; have an idea of what you're expecting to see; know where the bottom line comes from; see if the change is normal or out of the blue.

Smething I find important is that you ought to have a good idea of what a good business looks like. If you don't, you're going to get suckered in by "sales growth", growth this and growth that. Not sayingn that an up and coming business with a long history of losses can't rise and start to make money after years of investment/losses... just that established, well praised companies that are terrible businesses also sell the same bs grow stories too.

 

[RickSanchez]

Such wisdom.

Can you give me a pointer as to where to start on evaluating a "good business" with a couple of good businesse's out there?

I come across lots of claims about certain businesses being great but it all seems quite speculative gobledigook.

 

[luutzu]

Such wisdom.

Can you give me a pointer as to where to start on evaluating a "good business" with a couple of good businesse's out there?

I come across lots of claims about certain businesses being great but it all seems quite speculative gobledigook.

Most, just about all that I've read, AFR and stuff on how great a business is... they always quote the sales growth and the market potential of a business. That's just lazy writing.

So if a business is "young" and show massive growth in revenue - which is kind of what you'd expect from a new business seeing how any new revenue over a small base is massive.

But if you're an armchair fat-cat investor who's only interested in buying businesses that makes actual money, don't much care how the money is made, and ignore the future possibilities, not interested in the hype about getting in on the bottom - i.e. bare some losses now but will be rewarded big time later.

Basically, a business is dynamic, in a competitive environment, in an economy where new technologies, changing consumer taste etc. etc could ruin a dominant business in a matter of years; turn a nobody little schrimp into... a Seek?

In other words, you're looking for businesses with a (long) history of great performance; ideally in an industry where it is dominant, or the resources and patents in its control are so impressive that a new idiot at the helm, a few mistakes here and there... couldn't ruin it completely... or over a long enough time frame you and your armchair can pick it up and get out.

I'm trying to say that the future... we hope for the best... but we can't predict it. That's what the future is right?

Accepting that, what makes a business a good one?

Remember Buffett's and Munger's (and Graham's) advise that quality isn't enough. I mean, you can overpay into a quality business and eventually it will work out alright too... but ideally you'd want both quality at a sensible price.

Here we're going to look at quality alone.

It's pretty simple.

Look at the company's Retained Earnings (with, then without dividends) and its Contributed Equity.

CE is what shareholders put in. As an investor/owner of the business, you really do not want to put in anymore money to a business and yet still collect those coupons. And if you really need to contribute more... it ought to be incremental, rare, once in a blue moon sort of thing... and when you do cough up new cash, it ought to be because there's some incredible new opportunity the business must take on and they need some quick cash to seriously bring the business to new heights.

But in general, CE should remain flat or declining. Decline mean there have been share buyback, capital return.

Retained earnings must rise.

A profitable business pays its shareholders dividend, kept some back... and this is shown in its RE - in the balance sheet.

That's pretty much universal across all businesses. Established ones anyway.

Again, not saying crappy businesses won't grow up and take over the world. But you got to really know that business inside out to make any kind of judgment. Either way, that's really speculating rather than investing. Well, it's investing where you might not see your money again.

Now, in pictures.....

GREEN are retained earnings.
Dark Grey/black are CE.

Good quality business rising RE; Flat or decline CE.
Poor quality ones the reverse... always need new cash. And if you see new CE, you can bet they also increase their long term borrowing too.










THE BAD

 

[RickSanchez]

Most, just about all that I've read, AFR and stuff on how great a business is... they always quote the sales growth and the market potential of a business. That's just lazy writing.

So if a business is "young" and show massive growth in revenue - which is kind of what you'd expect from a new business seeing how any new revenue over a small base is massive.

But if you're an armchair fat-cat investor who's only interested in buying businesses that makes actual money, don't much care how the money is made, and ignore the future possibilities, not interested in the hype about getting in on the bottom - i.e. bare some losses now but will be rewarded big time later.

Basically, a business is dynamic, in a competitive environment, in an economy where new technologies, changing consumer taste etc. etc could ruin a dominant business in a matter of years; turn a nobody little schrimp into... a Seek?

In other words, you're looking for businesses with a (long) history of great performance; ideally in an industry where it is dominant, or the resources and patents in its control are so impressive that a new idiot at the helm, a few mistakes here and there... couldn't ruin it completely... or over a long enough time frame you and your armchair can pick it up and get out.

I'm trying to say that the future... we hope for the best... but we can't predict it. That's what the future is right?

Accepting that, what makes a business a good one?

Remember Buffett's and Munger's (and Graham's) advise that quality isn't enough. I mean, you can overpay into a quality business and eventually it will work out alright too... but ideally you'd want both quality at a sensible price.

Here we're going to look at quality alone.

It's pretty simple.

Look at the company's Retained Earnings (with, then without dividends) and its Contributed Equity.

CE is what shareholders put in. As an investor/owner of the business, you really do not want to put in anymore money to a business and yet still collect those coupons. And if you really need to contribute more... it ought to be incremental, rare, once in a blue moon sort of thing... and when you do cough up new cash, it ought to be because there's some incredible new opportunity the business must take on and they need some quick cash to seriously bring the business to new heights.

But in general, CE should remain flat or declining. Decline mean there have been share buyback, capital return.

Retained earnings must rise.

A profitable business pays its shareholders dividend, kept some back... and this is shown in its RE - in the balance sheet.

That's pretty much universal across all businesses. Established ones anyway.

Again, not saying crappy businesses won't grow up and take over the world. But you got to really know that business inside out to make any kind of judgment. Either way, that's really speculating rather than investing. Well, it's investing where you might not see your money again.

Now, in pictures.....

GREEN are retained earnings.
Dark Grey/black are CE.

Good quality business rising RE; Flat or decline CE.
Poor quality ones the reverse... always need new cash. And if you see new CE, you can bet they also increase their long term borrowing too.

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THE BAD
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First, thanks for the great visuals.

Where can I get my hands on businesses (and graphs) like those? Is there a reliable search tool you use to get businesses following those particularly good profiles?

 

[luutzu]

First, thanks for the great visuals.

Where can I get my hands on businesses (and graphs) like those? Is there a reliable search tool you use to get businesses following those particularly good profiles?

That's from an app I'm (re)building. Should be release next few weeks, hopefully. It'll be free so I'm not trying to sell anything, promised.

The samples are companies I typed up to test the data and charts/calculation. Maybe others will find it useful, who knows.

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I don't know whether it's reliable or the most efficient way or not... But how I go about finding stocks is basically following Buffett, and Fisher's, advise and simply go down the list of companies I can figure out.

Retails, engineering, industrials, healthcare... basically non-financial businesses are pretty straight forward to look into. With my few bucks in the bank those are enough to play with for me.

So start from A then go down to Z. Quickly gauge how the business look from those free research on commsec etc. You should be able to knock most stocks on the ASX out in under two minutes.

Then narrow those that looks interesting. Look further into them using my awesome app

But with the metrics from the charts above, you can also just look at the Equity section of the Balance Sheet. That's where they are.

 

[RickSanchez]

Will do. Thanks. Keep me posted once your app is up