Reported profits: when nothing is quite as it seems

Anyone who thinks that businesses are easy to manage and that profits are easy to predict could learn a lesson or two from the results of two public companies in the marketing sector that reported this week.

On the one hand there was Weare2020 – what a ludicrous name – reporting an increase in profit that had a zero effect on a continuing decline in its share price that has lasted for the best part of a year, while on the other hand Next Fifteen Communications Group reported a profit decline that did little to accentuate the short-term dip in an otherwise steady increase in share price.

What the share prices reflect is roughly what the more thinking analysts and observers have worked out for themselves: the underlying profit at Weare 2020 is going down, but the underlying profit at Next Fifteen is going up.

In both cases the superficial picture painted by the results has been distorted by one-off events.  Weare2020 was able to present an underlying break-even position as a £0.5 million profit simply because it had succeeded in recovering part of a bad debt incurred years ago and written off at that time.  The recovery was due to a piece of good fortune, but had nothing to do with the underlying trading performance.

By contrast Next Fifteen suffered from a big piece of bad luck when a senior member of the financial team walked away with the best part of £2 million to which he or she was not entitled.  That’s every finance director’s nightmare and, while the company has not made public the nature of the fraud, or whether elementary controls were either lacking or inadequately policed, if a senior employee in the finance department is determined to commit fraud he or she will probably succeed for a time at least.

So without wishing to offer a palliative to Next Fifteen’s financial team, or to understate the merit of recovering a bad debt at Weare2020, it is at least as important to understand what is happening in the underlying businesses.  And in these two businesses, the underlying performance is the opposite of what the bottom line results portray.

Bob Willott is editor of “Marketing Services Financial Intelligence”