One-time charges

Q:

What does a “one-time charge” refer to on a company’s financial statement? — S.T., Dover, N.H.

A:

It’s an accounting adjustment meant to reflect a nonrecurring unusual outflow (or inflow) unrelated to the company’s business operations. For example, it may be tied to a lawsuit, layoffs or a plant closing.

Some companies frequently include one-time charges in their reporting, making them not so “nonrecurring.” Such accounting can be used to make a company’s performance look better than it was. According to the Corporate Finance Institute, for example: “Airline companies are often involved in fuel hedging to control their costs. Sometimes, hedging activities generate large profits. A company may decide to include such profits in their revenue numbers even though fuel hedging is not its core business.”

Beware of companies with too-frequent “one-time” charges, and when you see one, try to figure out whether it’s problematic.

Q:

Are companies with low profit margins bad investments? — C.R., Vineland, Colo.

A:

Not necessarily. Fat profit margins are generally preferable, as they often reflect competitive advantages (such as a strong brand that commands a higher price). Still, you needn’t avoid lower-margin businesses. Instead, look at the whole picture.

Imagine, for example, that the Laverne Brewery Inc. (ticker: DEFAZ) has a whopping net profit margin of 25 percent, while Shirley Beer Co. (ticker: FEENY) has just a 2 percent margin. But if Laverne sells only three cases of beer a year, while Shirley sells thousands, Shirley is the better buy, generating more total profit.

Some industries, such as pharmaceuticals, financial services and software, often have high profit margins. Furniture stores and supermarkets typically have low ones — but if they have high sales volume, they can still be good investments.