Ann: ANZ Wealth Management updated financial information, page-14

"I'm a bit weary of using underlying NPAT to arrive at a PE multiple because they can vary wildly as shown below. Would it be fair to say that, when its all said and done, over many years, it is the reported EPS that captures the true performance of the business? For example, amortisation of intangible assets and impairment of goodwill, and settlement of legal claims, actually matter over the long term. Hence the accounting standards.

FY, Reported EPS, Underlying EPS, difference

18, 26.4, 57.3, +117%
17, 38.7, 56.5, +46%
16, 65.7, 57.8, -12%
15, 47.7, 59.9, +25%
14, 43.7, 53.1, +21%
13, 34.4, 46.9, +36%
12, 8.4, 41.6, +395%
11, 43.1, 48.3, +12%
10, 33.7, 42.3, +25%

Average over the past 9 years. 37.9, 51.5, +35%
Average Underlying EPS of 56.9 over past 5 years."


@vic_wattle,

Apologies, but I'm going to have to differ with you in relation to some substantive aspects of your post.

Like you, I too am wary of companies that go to great lengths to draw a distinction between Underlying and Reported Profit. (And very few companies do so with the same gusto and enthusiasm as IOOF!).

So what I do in these sorts of situations - where reconciliation of "Reported" to "Underlying" is complicated to an extent that requires a Masters degree in Forensic Accounting - in order to determine the extent to which "Reported" or "Underlying" best reflect the true financial performance of the business, is I look to my financial statement of choice, the financial statement that can't tell a lie, viz. The Statement of Cash Flows [*]

And when I calculate Free Cash Flow Per Share (FCF PS) [calculated as Operating Cash Flow Less (Payments for PP&E +Payments for Intangibles), all divided by Weighted Average Shares on Issue] as the reference point for determining which form of EPS (Underling or Reported) is the more relevant, the unambiguous conclusions are that Underlying EPS is the more reliable figure, and that Reported EPS is actually decidedly misleading and understates the true earnings of the company.

As the Table below shows, over the review period you chose (i.e., 2010 to 2018), FCFPS averaged 99% of Underlying EPS.

By contrast, FCF PS over that period exceeded Reported EPS by some 35%.

Not just that, but the annual variance of FCF PS is significantly higher compared to Reported EPS than it is compared to Underlying EPS.



So, quite clearly, Reported EPS is a distinctly inferior representation of the financial performance of the business both over time, and also in any single financial year.

And Underlying EPS, because it correlates closely with FCF PS (both in average terms, as well as in the degree variance around the average) is the measure that one should be happy to use as a measure of financial performance.

In fact, over the past 5 years, a period you referenced in deducing that Underlying EPS averaged 56.9c, FCF PS averaged 58cps, and Reported EPS averaged just 44cps.


In conclusion, because I am anchored in FCF as a valuation parameter, in the case of this stock I consider Underlying EPS - given it being a close proxy for FCF PS - to be far more reliable financial metric than Reported EPS.

And that's one of my criticisms of the accounting standards: they do not yield absolute accounting precision. Instead, they merely provide a framework for the approximation for financial statements based on the invoking of a range of assumptions.

Which is why all financial accounts need to be given a good scrubbing and sanitising before they can be taken seriously.


[*] Well, under extreme cases the Cash Flow Statement can be made to tell a few porkies, but not nearly as easily as the P&L or the Balance Sheet.