Are profits at Centrica (LSE: CNA) distorted by unusual items?
Right now I'm trawling through the FTSE 100 (UKX) and double-checking for blue chips that may be flattering their profits.
You see, many companies these days report 'underlying' earnings, which are calculated by excluding costs the firm deems to be 'exceptional'. Trouble is, some companies are more cavalier than others when it comes to sweeping awkward expenses away from the headline figures.
Today I'm looking at Centrica (LSE: CNA) to see if its reported earnings have been distorted significantly by exceptional, one-off or unusual items. I've extracted the following statistics courtesy of S&P Capital IQ:
|Year to 31 December||2007||2008||2009||2010||2011|
|Profit before unusual items (£m)||1,867||2,021||1,661||1,931||2,037|
|Restructuring charges (£m)||-||-||(75)||-||(265)|
|Asset writedowns (£m)||-||(31)||(184)||(179)||(227)|
|Other unusual items (£m)||244||(1,331)||(406)||1,057||(277)|
While annual figures can provide some insight into how a business has performed, I reckon looking back over several years provides a better view of possible problems in relation to one-off costs.
So between 2007 and 2011, my stats tell me Centrica reported cumulative profits before exceptional items and tax of £9.5bn. However, aggregate exceptional costs came to £1.7bn -- equivalent to a notable 18% of cumulative 'underlying' profits.
I was somewhat surprised by the sheer number of one-off items peppering Centrica's profit and loss account. For example, its most recent results list the re-measurement of energy contracts (rather topical, given current allegations of price fixing in the wholesale market), a withdrawal from Europe, impairment costs against its UK generation assets and a large-scale cost-reduction programme.
Re-measurement of energy contracts appear to be main culprit, however, and account for the majority of the two large "other unusual items" figures in 2008 and 2010. This is certainly an area shareholders will want to keep an eye on. On the surface, Centrica may appear to be a relatively simple business, but the pricing structures relating to how it purchases gas and electricity can be fiendishly complex.
Somebody who always studies earnings numbers in detail is Neil Woodford, the UK's leading equity income fund manager. Mr Woodford's portfolios thrashed the FTSE 100 during the 15 years to 2011 and this exclusive Motley Fool report -- which can be downloaded free today -- reviews his favourite blue-chip shares for 2013 and beyond.
> Stuart does not own any share mentioned in this article.