A Very Quick Look at Rio Tinto's Earnings

LONDON -- Right now I'm trawling through the FTSE 100 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." The trouble is that some companies are more cavalier than others when it comes to sweeping awkward expenses away from the headline figures.

Today I'm looking at Rio Tinto (LSE: RIO.L  ) (NYSE: RIO  ) 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:

 

2007

2008

2009

2010

2011

Profit Before Unusual Items (millions of pounds)

4,850

9,934

4,858

13,004

14,858

Impairment of Goodwill (millions of pounds)

-

1,532

428

482

119

Asset Writedowns (millions of pounds)

(29)

(5,501)

(974)

(629)

(5,894)

Gain of Sales of Assets and Investments (millions of pounds)

128

336

553

334

(323)

While annual figures can provide some insight into how a business has performed, I reckon that looking back over several years provides a better view of possible problems relating to one-off costs. So, between 2007 and 2011, my stats tell me Rio Tinto reported cumulative profit before exceptional items and tax of 47.5 billion pounds. However, aggregate exceptional costs came to 9.4 billion pounds -- equivalent to a significant 20% of cumulative "underlying" profit.

Seeing a whole one-fifth of profit swallowed up by exceptional items is a pretty alarming statistic. And the cause can be summed up in one word: aluminum.

Rio Tinto bought Alcan in 2007 for $38 billion, merging it with its own aluminum operations. With the benefit of hindsight, it massively overpaid -- and it has since taken two massive writedowns on the value of these assets. Although Rio Tinto is now the global leader in aluminum, profit margins in recent years have been wafer-thin compared with those of other major metals.

This item aside, Rio Tinto's profit and loss account looks relatively clean. So the lesson from this quick analysis is clear: Be wary of big acquisitions!

Somebody who always studies earnings numbers in detail is Neil Woodford, the U.K.'s leading equity income fund manager. 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 favorite blue-chip shares for 2013 and beyond.

Are you looking to profit from this uncertain economy? "10 Steps To Making A Million In The Market" is the very latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- it's free.

Further Motley Fool investment opportunities:

Stuart does not own any share mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2075295, ~/Articles/ArticleHandler.aspx, 7/26/2014 3:21:40 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement