What’s the difference between “net income” and “core net income”?
A few readers wrote in to ask about yesterday’s Note about D.M. Wenceslao [DMW 6.90], where I reported that its FY21 net income was down 3%, but that if a P1-billion one-off gain from FY20 is excluded, its net income would actually have been significantly better.
Just so that we’re all on the same page, “net income” is the amount of money that is left over after all of the expenses, costs, taxes, and interest are taken out of revenue for a given period.
That definition includes a lot of stuff like one-off gains and losses that, when included into the final figure, might not give that good of a measure of how well the actual business did during that period.
That’s one of the reasons why a company might report a “core net income” figure, which looks to exclude gains and losses from “extraordinary events” and other one-offs that are non-recurring and unrelated to the company’s primary business.
In this case with DMW, simply subtracting the P1 billion one-off gain from FY20’s net income didn’t result in something that I’d say is “core net income”, because I didn’t take into consideration any other one-offs and non-recurring gains/losses that might have impacted either period.
It was just a quick way to demonstrate that what might look disappointing on the surface (a 3% decrease in profit) might actually be pretty great from another perspective.
If I had taken a much closer look, I might have also excluded from DMW’s FY21 net income the one-off gains attributed to the CREATE Law, and upon doing this, I might have gotten closer to something that I’d feel comfortable calling a “core net income” analysis.
With the FY20 one-off and the FY21 one-off removed, it looks like DMW’s core net income went up about 44%.
MB BOTTOM-LINE
The exact definition of “core net income” might change depending on the situation, or on the company applying the metric.
It’s not recognized as a standard accounting measure, so it’s more of an internal metric that companies can use to help investors get a better understanding of how the primary business is doing.
That’s why the concept of “core net income” is most likely to come up during a pre-earnings press release, the kind that comes out a couple of weeks before the full quarterly or annual earnings report is released, that tries to guide the market with highlights of the report to come.
During normal times, when a company does well you won’t really hear anything about “core net income”, because the company will happily report some huge/record net quarterly or annual net income.
But, when things get weird because of a pandemic, reorganization, or other unusual event, it might make a lot of sense to try and exclude that weird stuff from the normal stuff to give investors a better idea of what’s actually happening with the business itself.
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Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.
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