HEPS vs Core Earnings: Impairments Explained for JSE Investors

0:00 Welcome back to the money Money Start podcast for South African retail investors who want to stop feeling like they're drowning in jargon and start navigating the market like someone who's actually knows what they doing. I'm your host, Jay, and today we finally tackling the phrase that gets slapped onto every Jaycee sense announcement like it's tomato sauce on a slope. Chiproll HIPS would also breaking down what core earnings really mean and why impairments are not just what your uncle blames for the 4th failed business venture. So if you've ever looked at the company's results and thought why is the headline profit different from the actual profit, this episode's for you.

0:40 So let's start with HIPS, which is headline earnings per share. Now if you're thinking hang on, didn't we already cover EPS in episode 1? Well could be right, but HIPS is the Jaycees localised remix. EPS tells you how much profit is attributable to each share after tax and interest. HIPS on the other hand is like Epps's socially acceptable cousin. It excludes all the weird one offs that distort normal things. Things like selling a building, scrapping an old factory, or writing down the value of the CEO's felt cryptocoin hustle. Imagine for instance you're running a pool of worstall. One month you make 5000 in profit from selling voice and then randomly sell your Bucky for 80,000 Rand. Your EP says 85,000 profit divided by the number of poorly shares.

1:34 Your HIP says ohh hang on hang on. The Bucky sell is a one off so let's just focus on the 5000 from actual voice making. So hip strips out all of the noise. That's why it's often the preferred metric for analysts. It gives you a cleaner view of the ongoing operations. The JSE actually requires listed companies to report HIPS in their results, not just for fun, but to give investors A clearer picture of real recurring earnings. Companies love using clever accounting to make things look rosier than they actually are.

2:10 HIPS tries to block that nonsense by saying only show us the numbers that matter for long term profitability, buddy. It's basically earn no makeup selfie of the financial world. Show us the real you, wrinkles and all. Now here's where things get a bit more juicy. Because while HIPS is a regulated metric, the Jaisy has rules for what must be excluded. Core earnings is, well, a bit more like choose your own adventure type thing.

2:39 Core earnings is what management think is a better reflection of the company's ongoing performance. They often exclude not just one source, but also other stuff they think is non core. Foreign exchange losses, startup losses in a new market, restructuring cost, even low chitting penalties. So while HIPS is strict and formulaic, core earnings is more like trust me bro this is the real picture. It's kind of like your mate saying yeah I only spent 500 round at the club last night but is not counting the Uber, the tip, all the damage deposit for breaking the bar store. Should you trust core earnings?

3:19 Sometimes. But I would suggest always asking what are they excluding? Is this a one off or a pattern? Are they painting lipstick on a pig or genuinely showing you the engine under the hood? Okay so now we get on to the spicy stuff. Impairments, impairments or when a company says ish this thing we bought is no longer worth what we thought it could be. An over valued asset, a factory that no longer makes sense, or goodwill from an acquisition that turned out to be about as strategic as buying Bitcoin at 1.2 million Rand. When a company writes down the value of an asset, it's called an impairment.

4:01 And impairments can have a massive effect on net profit, but they are usually excluded from hips. Let's say Woolworths writes down 5 billion from David Jones. Their net profit drops like a Curry stained white shirt in bleach. But hips hips says we know you messed up but we won't count this one off hit when we value the underlying business. It's like the financial version of saying shame. We all make mistakes.

4:29 Let's not judge them on this one blunder. But, and this is a big butt, if a company keeps making regularly impairments like every year, then maybe the business is just bad at making good decisions and it's not a one off. That is a pattern. Real examples on the JSE would include telecom. They often report big impairment from legacy copper infrastructure.

4:54 Their HIPS excludes it. But they investors have to ask why do these impairments keep popping up like that one uncle at every family funeral become pay When they sold off some properties it boosted profits by the hip structured out. Why? Because property sales aren't they call business unless you secretly trying to become a REET MTN they call earnings often exclude currency devaluations in Nigeria and restructuring costs. You can understand the logic, but it also means you need to read the fine print to see what's actually being left out. So what should we tell investors? Look at well, that's a good question and know the answer isn't just listen to this podcast, although that's obviously the smart thing you can do when looking at results. Look at hips to understand recurring performance. Read management commentary to see what's being explained or excused.

5:50 Treat core earnings with cautious curiosity. It might show you useful information, but it's also an invitation to ask are you just massaging these numbers or is this really fair? And always compare HIPS trends year on year. If HIPS is consistently falling while core earnings are magically steady, something should smell Fisher than an unwashed snook on a hot day.

6:14 So time for your stock fell start to back off stock lingual for this volume 15. Let's do a quick wrap up. HIPS is the Jaycees version of a cleaner Epps. It removes one off so we can see the real earning power. Core earnings is what the company wants you to focus on, but check what they're excluding and ask why. In payments can be big, scary and sudden that excluded from HIPS but not from the net profit.

6:42 So keep an eye on how often they appear. In short, not all profits are created equal and justice, like with dating, it's what they hide that matters the most. So while my jokes may be more suspicious than a limited time crypto token, remember none of this is financial advice. Please do your own research, speak to a licensed advisor, catch you next time on the Money Matters where we make sense of the market, one head scratching acronym at a time.