Stock Market Commentary: What is the difference between “net profit” and “base net profit”?

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A few readers wrote in to ask about yesterday’s note on DM Wenceslao [DMW 6.90]where I reported that its net income for FY21 was down 3%, but if a one-time gain of 1 billion pesos in FY20 is excluded, its the net income would have actually been significantly better.

Just to get us all on the same page, “net income” is the amount of money left over after all expenses, costs, taxes and interest have been taken out of income for a given period.

This definition includes a lot of things like one-time gains and losses which, when included in the final figure, might not give a good measure of the actual performance of the business over that period.

This is one of the reasons why a business may report “basic net income”, which seeks to exclude gains and losses from “extraordinary events” and other one-time, non-recurring and unrelated items. main activity of the company.

In this case with DMW, simply subtracting the one-time gain of 1 billion pesos from net income in FY20 did not result in something that I would describe as “basic net income” because I only took into consideration no other one-time gain. and non-recurring gains/losses that could have impacted either period.

It was just a quick way to demonstrate that what might look disappointing at first glance (a 3% drop in earnings) might actually be pretty great from another perspective.

Had I looked closer, I might also have excluded from DMW’s net income for FY21 the one-time gains attributed to the CREATE Act, and in doing so, I might have gotten closer to something what I would feel comfortable calling a “basic bottom line” analysis.

With the FY20 one-off and FY21 one-off removed, it appears that DMW’s base net income has increased by around 44%.

MB RESULTS

The exact definition of “basic net income” may change depending on the situation or the company applying the measure.

It’s not recognized as a standard accounting measure, so it’s more of an internal measure that companies can use to help investors better understand how the core business is doing.

That’s why the concept of “core net income” is most likely to appear in a pre-earnings press release, the kind that comes out a few weeks before the release of the full quarterly or annual earnings report, trying to guide the market. with highlights of the upcoming report.

Normally, when a business is doing well, you won’t really hear about “core bottom line” because the business will happily report huge/record quarterly or annual net income.

But, when things get weird due to a pandemic, reorganization, or other unusual event, it can make a lot of sense to try to exclude those weird things from the normal stuff to give investors a better idea. what’s really going on with the company itself. .

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