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Speaker 1: Welcome to Ask Fear and Agreed, where we take your

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Speaker 1: questions and do our very best to answer them. I'm

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Speaker 1: Michael Thompson, and good afternoon, Sean Aylmer.

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Speaker 2: Good afternoon, Michael. Sean.

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Speaker 1: Today's question comes from Liam on Facebook, and you can

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Speaker 1: do it through Facebook or LinkedIn or Instagram, or you

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Speaker 1: can head to Fear and Greed dot commodo you if

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Speaker 1: you've got your own questions, sent it in through there.

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Speaker 1: We love getting questions, we love answering them. And how

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Speaker 1: about this one, Sean? He says, something I wonder every

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Speaker 1: time we get to earning season, so it's a very

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Speaker 1: timely question from Liam. This one. He says. We hear

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Speaker 1: companies talking about net profit and underlying profit, but what's

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Speaker 1: the difference? And yes, he says, I've googled it before.

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Speaker 1: But the question that Google can't really answer for me

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Speaker 1: satisfactorily is which one actually matters.

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Speaker 2: That's because it is an unanswerable question. It all depends

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Speaker 2: where you're coming from. On this one, it's it is

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Speaker 2: a cracking quest es Lamb. So in theory, the net

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Speaker 2: profit includes everything bottom line, end of the day, this

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Speaker 2: is how much money we made there you go underlying

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Speaker 2: profit excludes a bunch of things that are considered one off,

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Speaker 2: like just happened in that six months or that twelve months,

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Speaker 2: so we're not going to do it again. It might

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Speaker 2: be an extraordinary item, non recurring items. The idea is

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Speaker 2: that you take all these odds and sods out and

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Speaker 2: the actual core business, how earning is going in the

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Speaker 2: core business is reflected in underlying profit. Okay in theory,

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Speaker 2: so underlying profit is you know, this should be repeated

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Speaker 2: next year, net profit. It actually includes the one off things.

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Speaker 2: The argument is what can be left out of underlying profit? Right,

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Speaker 2: So redundancy payments they tend to be below the line,

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Speaker 2: so they're not in underlying profit, but the company still

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Speaker 2: has to make that redundancy payment. There's still loss. It's

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Speaker 2: real money read physical money that needs to be transferred

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Speaker 2: totally totally. Remember we talked about the rets the real

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Speaker 2: estate investment trusts, and we talk about the revaluations and

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Speaker 2: how huge they are, so they're they're often not in

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Speaker 2: underlying earnings, but they're sort of revaluation of physical property,

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Speaker 2: intellectual property, that type of stuff. When we worked I

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Speaker 2: used to work in newspapers, the value of the mass

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Speaker 2: had always always revalued down that sort of stuff is

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Speaker 2: kept out charges from restructuring. There are rules, but really

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Speaker 2: it's up to the company to interpret them. So you

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Speaker 2: end up with all sorts of things in that the

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Speaker 2: difference between underlying and net, all sorts of things that

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Speaker 2: some people would put in others wouldn't. It's not I mean,

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Speaker 2: it's not very clear. So it's a great question.

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Speaker 1: So it's a bad then, So listening to that, it

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Speaker 1: sounds so kind of ambiguous. Yes, and it would vary

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Speaker 1: so much from company to company in terms of what

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Speaker 1: they are able to exclude or willing to exclude because

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Speaker 1: it has opened somewhat to their interpretation. Is a good

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Speaker 1: thing is does it make it hard to compare kind

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Speaker 1: of like for like?

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Speaker 2: So sometimes it's good. So let's say a company sells

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Speaker 2: an asset, makes one hundred million dollars, sells an asset

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Speaker 2: for fifty million dollars. Therefore it's got a profit a

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Speaker 2: bottom line of one hundred and fifty million dollars. That's true,

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Speaker 2: but the following year it's going to get back to

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Speaker 2: that hundred and So the idea is that you that's

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Speaker 2: not in the underlying earnings it's sort of outside that,

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Speaker 2: and so the recurring earnings is about underlying so you

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Speaker 2: take it out. So sometimes it's actually a good thing. Yep,

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Speaker 2: Sometimes it's bad because company can slip things into extraordinary

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Speaker 2: items that maybe shouldn't be there. Now, when some of

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Speaker 2: our guests come on the show and they talk about

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Speaker 2: quality of earnings, this is kind of what they're talking about.

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Speaker 2: How people have put their profit and loss statement together

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Speaker 2: and where they've chucked stuff and if they've chucked it

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Speaker 2: kind of in extraordinary items. But yeah, last year it

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Speaker 2: was actually in underlying earnings. It suggests the quality of

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Speaker 2: earnings ain't so good. And when you have a market

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Speaker 2: like we have at the moment, where interest rates have

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Speaker 2: been high for a while now and some companies are

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Speaker 2: really struggling, they start fudging would be far too strong

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Speaker 2: a word, Michael, far too strong a word, but leaning

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Speaker 2: towards putting things where they shouldn't Well.

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Speaker 1: I was interested to hear that then, these kind of

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Speaker 1: extraordinary items. As a business journalist, when you were tasked

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Speaker 1: with going through companies results, it was difficult. Is it

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Speaker 1: hard to then try and figure out, Okay, should this

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Speaker 1: be here? Should this not be here? But also, is

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Speaker 1: it a little bit of a beacon to say, hey,

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Speaker 1: look look at this. Look look what's kind of been

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Speaker 1: tucked in here.

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Speaker 2: So I was never smart enough to work out exactly

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Speaker 2: what is and what isn't there, Like you need someone

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Speaker 2: with serious clout in accounting rules to know. What you

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Speaker 2: could do was look at the percentage relative to total

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Speaker 2: earnings that was below underlying earnings, and so suddenly you know,

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Speaker 2: the extraordinary stuff was like five three percent, four percent,

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Speaker 2: twenty seven percent, and there wasn't an asse at sale

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Speaker 2: or anything. You think, oh, hold on, that's a bit weird. Well,

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Speaker 2: and then suddenly please explain. So, yeah, it is a contest.

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Speaker 2: In the last few years has come under enormous criticism

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Speaker 2: really for some of the way they have accounted for

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Speaker 2: some things. And I mean, I'm they're not They would

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Speaker 2: have a good argument why they did it, so I'm

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Speaker 2: not saying they're wrong, But then others would say no, no, no,

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Speaker 2: that's not how you do it. So great question, Liam, This.

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Speaker 1: Is a fantastic question. And I know we kind of

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Speaker 1: veered off in a few different directions, but goodness me,

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Speaker 1: I find that interesting. Unlike us, Liam, I hope, I

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Speaker 1: hope that you have been able to get a better

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Speaker 1: answer out of Sean than you have been able to

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Speaker 1: get out of Google. I think so this is certainly

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Speaker 1: more context, certainly more words used.

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Speaker 2: Yeah, so when I googled this, when I saw this

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Speaker 2: question was coming, because I think it was interested that

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Speaker 2: he googled it. And there is plenty of Google black

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Speaker 2: and white answers. Yeah, but there's no Google like. It

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Speaker 2: doesn't explain all the gray and there's a lot of gray.

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Speaker 1: Yeahs. And that's where the fun is exploring all of that,

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Speaker 1: isn't it. Anyway? Thank you very much Liam for the question,

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Speaker 1: and thank you Sean for answering it. Thank you Michael,

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Speaker 1: And remember, if you've got something that you would like

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Speaker 1: to know, then please send your question on through Even

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Speaker 1: if it's something that you've asked Google before and you

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Speaker 1: just want a bit more context and you want to

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Speaker 1: know how it actually applies to you and to your

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Speaker 1: business or to your life, then send it on through LinkedIn, Instagram, Facebook,

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Speaker 1: or a Fear and Greed dot com dot au. Are

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Speaker 1: Michael Thompson and this ask Fear and Greed