Un­der­stand­ing yearend HEPS re­sults

Finweek English Edition - - INVEST DIY -

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.

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