One-off gain/loss is non-recurring profit or loss made by a company, through various channels such as selling/writing-off Property , Plant and Equipment (PPE), sales of investment properties, inventories writing-off, sales of financial instruments, etc. Identifying one-off gain/loss would need one to understand the business model, so as to separate the core earnings and non-core earnings. We want core earnings, as that should be the focus of the business.
One-off items will also cloud the actual earnings should they not being removed from the equation. It is vital to identify the actual earnings of a company as that reflects the actual earning power of a company.
Selling/Writing-off Property, Plant and Equipment (PPE)
A company would need to buy new PPE for expansion of capacity, additional capabilities and/or improvement in efficiency, as well as maintain/replace existing machine to retain efficiency. During these activities, one would find an additional line in cash flow statement, showing gain/loss from selling/writing-off PPE. Other than property development companies, usually this item is a one-off item and should be excluded from the earnings.
Caution: Should this become recurring for a number of years, further investigation is a must to uncover the underlying reason!
Sales of Investment Properties
Investment properties are part of the pool of assets of a company. Subjective to the business model and management decision, some companies may hold investment properties for additional rental income or capital gain. Other than property development business, this item should be taken as one-off item.
Inventories Writing-Off
At times, a company would have to write-off certain portion of its inventories, due to (but not limited to) obsolete products, damaged inventories, etc. Subjective to the underlying business model, inventories write-off may become a recurring item. Always seek to understand the business model.
Sales of Financial Instruments
Financial instruments consist of (but not limited to) foreign currency forward contracts, holdings of marketable securities, hedge funds, unit trusts, etc. Except financial and investment related business, these items would be one-off items and therefore, be excluded from earnings.
As this is a wide subject, there will be addendum from time to time. Remember to drop by to get more contents and ideas. Have fun!
