LONDON -- 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 Royal Bank of Scotland (LSE: RBS.L) (NYSE: RBS) 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/(loss) before unusual items* | 9,456 | (7,337) | (6,870) | 246 | (1,353) |
| Restructuring charges* | (108) | (1,357) | (1,286) | (1,032) | (1,059) |
| Goodwill impairment* | - | (16,911) | (363) | (10) | (91) |
| Asset writedowns* | 288 | (86) | (117) | (405) | (139) |
| Other unusual items* | - | - | 5,989 | 802 | 1,876 |
*in millions of pounds.
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 Royal Bank of Scotland reported cumulative losses before exceptional items and tax of 5.9 billion pounds. However, aggregate exceptional costs came to, er, 14 billion pounds -- equivalent to a ridiculous 237% of cumulative "underlying" losses.
It's difficult to know where to start here. Such has been the turbulence at Royal Bank of Scotland in recent years, you could argue analyzing its profit and loss account in this way is fairly meaningless.
Royal Bank of Scotland is the only company we've looked at that has made underlying losses over the entire five-year period, and that's before a succession of restructuring charges, and the massive goodwill charge in 2008 relating to its purchase of ABN AMRO.
Its accounts for 2012 are also likely to make grim reading. From next year, though, the majority of the cleansing of the old, bad RBS should be complete, so you would hope its profit and loss account will start to look a lot healthier, and less riddled with one-off items.
Looking at companies like RBS, you can see why Neil Woodford, the U.K.'s leading equity income fund manager, decided to abandon the banking sector altogether. 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.
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