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What to Adjust?
The Seasonality Factor in Earnings
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What to Adjust? 

 Determining which income and expense items to adjust in order to derive core earnings is subjective and may differ between individuals. For instance, in Table 4 in page 69, I excluded realised gain from foreign exchange. Some may have the view that in the course of the business, companies will have exposure to foreign exchange and thus, gain or loss from foreign exchange is part and parcel of the business. This is true as well.  

 The point here is that there are no set-in-stone rules for what should be adjusted and what shouldn’t be adjusted. It depends on:  


[1]. What we are analysing. 

 Are we analysing the trend of the core earnings, or are we comparing core earnings between peers? For instance, some companies may not have exposure to foreign currency sales whereas others may have. We have to take this into consideration so that we are comparing apples to apples.   


[2]. The nature of the business.  

 The classification of whether the item is core or non-core is dependent on whether it is part and parcel of the particular business. Gain on disposal of property is a non-core income for a food manufacturing business, but it is a core income for a property investment company.  

 In TexCycle’s case, the reason I exclude gain on foreign exchange is because TexCycle’s business is mainly localised.  

 I was asked this question:  

 So, what about companies with export and import business activities – do we still adjust for realised and unrealised foreign exchange?  

 My view is that realised foreign exchange is part and parcel of the business, i.e. based on the transaction that has already been completed. Unrealised foreign exchange, on the other hand, is based on expectations at the time of the report, at which point the transaction has yet to be incurred.  

 However, as I have stressed many times, analysis is an art, not a science. There are no concrete rules to it, as there are multiple possibilities and scenarios that can materialise in the investment world.    


The Seasonality Factor in Earnings   

 Listed companies in Malaysia have to disclose their financial statements on a quarterly basis to Bursa Malaysia and the statements are available on Bursa Malaysia’s website. This frequent disclosure is good as it allows investors to have constant updates on the performance of the company and its business performance.  

One tendency among investors is the comparison of the latest quarter performance to the quarter before. For example, comparing June 2017’s quarterly performance with March 2017’s quarterly performance. Such mind-set is no different from comparing the coldness in winter with the coldness in the autumn before.    

In the next posting, we will take a look at two real examples of companies that are affected by seasonal factors.  

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