The Money Maze TMM Nº 015

HEPS vs Core Earnings: Impairments Explained for JSE Investors

Length: 7 min

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HEPS vs core earnings explained: what headline earnings strip out, why JSE companies must report it, how impairments work and when "core" gets creative.

Show notes

HEPS gets splashed across JSE results like tomato sauce on a slap chip roll. Then companies add “core earnings”, “normalised earnings” and “adjusted” this and that. Here’s what headline earnings actually strips out, why impairments matter, and when “core” gets a bit creative.

By The Money Maze | Listen to the episode: Spotify

Read any South African results announcement and you’ll see at least two earnings numbers. Often three. If they all move in the same direction, great. If they don’t, that’s where the story is.

What is EPS?

Earnings per share (EPS) is the company’s profit attributable to ordinary shareholders, divided by the number of shares. It’s the bottom line of the income statement, calculated under IFRS accounting rules (IAS 33). It includes everything: trading profit, but also gains from selling assets and losses from writing them down.

What is HEPS?

Headline earnings per share (HEPS) is EPS with certain remeasurements stripped out, mostly once-off gains and losses on the capital side of the business.

Think of it like this. You run a boerewors stall. One month you make R5,000 selling wors, and you also sell your bakkie for R80,000 more than you paid. EPS says you made R85,000. HEPS says, “Nice bakkie sale, but let’s focus on the R5,000 from actual wors.”

Things headline earnings typically excludes:

  • Profits or losses on selling property, plant, equipment or businesses.
  • Impairments of goodwill, property, plant and equipment, and intangible assets.
  • Certain remeasurements on acquisitions and disposals.

Things it doesn’t exclude: everyday trading items like inventory write-downs, bad debts on customer accounts, and restructuring costs. Those stay in, because they’re part of running the business.

Why the JSE requires HEPS

HEPS is a South African speciality. JSE-listed companies must calculate and disclose headline earnings using SAICA’s Circular 1/2023, with a reconciliation from basic earnings to headline earnings. Auditors check it. That makes HEPS comparable between companies and over time, because everyone follows the same rulebook.

It’s also the number the JSE uses for trading statements. If a company expects HEPS or EPS to move by 20% or more, it has to warn the market.

What about core earnings?

Here’s where it gets interesting. HEPS follows strict rules. Core earnings, normalised earnings or adjusted earnings are management’s own measures. They exclude whatever management believes isn’t part of ongoing performance: currency losses, restructuring costs, start-up expenses, once-off legal settlements and more.

Sometimes that’s fair and genuinely helpful. Sometimes it’s lipstick on a pig. Always ask:

  1. What exactly are they excluding?
  2. Is it really a once-off, or has it happened three years running?
  3. Do they show a reconciliation back to IFRS profit and HEPS?

JSE rules require companies that publish these “pro forma” numbers to reconcile them and explain them. If you can’t follow the bridge from core earnings to HEPS, be suspicious.

Impairments: the silent profit killer

An impairment is a company admitting, “This thing we bought isn’t worth what we paid.” It could be an overvalued acquisition, an outdated factory, or a mine that’s no longer economic.

A big impairment hits EPS hard, but HEPS adds it back. That’s fair for a once-off. But repeated impairments are a red flag. Woolworths, for example, wrote down billions on its Australian David Jones acquisition over several years before eventually exiting it. Each write-down was “once-off”. Together, they told the story of an expensive mistake.

Remember: an impairment is a non-cash charge today, but the cash was spent when the asset was bought. HEPS ignoring the impairment doesn’t bring that money back.

A worked example

Say JSE Widgets has 100 million shares. This year it made R300 million from trading, sold an old warehouse at a R50 million profit, and impaired a failed acquisition by R200 million. Ignoring tax for simplicity:

  • Basic earnings: R300m + R50m − R200m = R150m. EPS is R1.50.
  • Headline earnings: remove the warehouse gain and add back the impairment. That’s R300m. HEPS is R3.00.

So EPS halved, but HEPS says the trading business is fine. Now say management also reports core earnings of R340 million, because it excluded R40 million of “once-off” restructuring costs. That’s the number to question. Was the restructuring really once-off, or will next year bring another one?

How to read the three numbers together

  • EPS and HEPS close together: clean year, few once-offs.
  • EPS far below HEPS: big impairments or losses on disposals. Find out what was written down and why.
  • EPS far above HEPS: big gains from selling assets. Don’t confuse a property sale with a better business.
  • Core earnings flat while HEPS falls: something smells fishier than snoek left in the sun.

Track all three over several years. Patterns matter more than any single result.

Stokvel Starter Pack

  • EPS: profit per share under IFRS, everything included.
  • HEPS: EPS without capital remeasurements like asset sales and impairments.
  • Circular 1/2023: the SAICA rulebook for calculating headline earnings.
  • Core earnings: management’s own adjusted number. Check what’s excluded.
  • Impairment: writing down an asset because it’s worth less than its book value.
  • Trading statement: a required warning when HEPS or EPS will move 20% or more.

Takeaway: Not all profits are equal. HEPS is the referee’s scorecard. Core earnings is the coach’s version. Read both, and pay attention when they disagree.

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More from The Money Maze

Sources

  1. Circular 1/2023: Headline earnings, SAICA.
  2. Circular 1/2023 headline earnings (JSE copy), JSE Limited.
  3. JSE Listings Requirements, JSE Limited.

This is not financial advice.

Transcript

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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.

The JSE stories worth knowing about, explained like a mate would at the braai. No hot tips, no spam.

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