2014 H1: Why Caverton’s 32% Drop In Pre-Tax Profits Is “Misleading”

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Caverton Group reported a 32% drop in Pre-tax profits to N2.6billion (2013 H1: N3.8billion) for the first half of 2014. However, a closer look at the results suggest this was an unintentional misleading message. The drop in profits was as a result of a N2billion in other income reported in the corresponding year (2013 H1) which boosted that years pre-tax profit to N3.8billion. The other income was mainly a N1.6billion interest written back into profits for the period.

Other income will drop to about N800m that year. Comparing the result without the other income reveals a 49% jump in operating profit. This is why I like to back out other income from operating profit. Most financial statements include it which is in line with reporting standards. However, as an analyst it can distort your views about the true earnings potential of the company’s core business operation. Caverton also reported a 21% increase in revenue to N12.5billion over the same period last year (2013 H1: N10.3billion)