Understanding yearend HEPS results
We’re seeing another spurt of results hitting the JSE as companies with a year-end of February are releasing results at a f renetic pace. (Remember companies have three months to release results, and typically we see them coming out some six weeks after the yearend.) One of the key features of any set of results is the headline earnings per share (HEPS). It gets trundled out with every Sens, the media pick up on them and company execs talk about them.
But what is HEPS, and what about the different types of HEPS?
At the core, HEPS is about profit, and we start with just earnings per share (EPS). This is revenue less all costs, which leaves us with the overall profit for the company. We then divide this number by the number of shares in issue and we get EPS.
EPS is not used much, albeit companies do report on it and it is defined by the International Financial Reporting Standards (IFRS), who set the standards for the terms used by listed companies. But the headline EPS number that results in HEPS is much more important.
The HEPS number removes profit or loss that occurs from abnormal and extraordinary items. So, for example, profit from selling a business unit or an office building is not included in HEPS, but would be included in EPS. This is important as HEPS is a truer reflection of the business. This is because while selling a business unit certainly does make a profit, it is not the usual activity of business for the company. In short, it is a one-off and so it is excluded from the normal operational activities and hence HEPS profit of a company.
What we often see is normalised HEPS. This is not an off icial IFRS term, so as a rule I ignore this number. A lot of companies will use normalised HEPS to adjust for the impact of BBBEE deals. I don’t have a problem with the logic, but as it is not an IFRS term, it means each company could determine a different method for ‘normalised’, so it makes it difficult to compare against peer companies.
For me, the most important HEPS number is the diluted HEPS. This uses the weighted number of shares, but also includes future shares that may be issued and are known about. These extra shares could be convertible bonds or preference shares that may convert to normal shares. It would also include stock options to directors that may also convert. So it offers a better picture of how many shares are in issue in future and, as such, a better HEPS number.
HEPS is also the number that gets used in the price/earnings (P/E) ratio. We divide the share price by the HEPS value for the last year, giving the P/E that is used as an indication of value.
A last but important point is a negative HEPS. It means just that: profit was negative (a loss). This would also result in a negative P/E ratio. Some companies will then use HLPS (headline loss per share), but we seldom see that used locally; a loss is merely recorded as a negative HEPS.