Exceptional items are unusual business costs that are reported separately from ordinary expenses or receipts. But why are they so important? Watch our easy-to-understand video from the #LearnWithUpstox series to learn about exceptional items and what they mean on a balance sheet.
Hi guys! I have some good news to share with you. Recently, I went to a wedding and for some reason, I was given a gift too – an envelope of cash. Now this cash has become a big addition to my income. Basically, on the balance sheet of my life, this is an exceptional item.
What are exceptional items for companies? Find out today in this video.
Welcome to our new series, Learn with Upstox!
I’m Aaditya Iyengar and in this series, we’ll be discussing some key aspects of fundamental analysis, corporate actions and some important general concepts about the stock market.
In this video, we’ll talk about exceptional items on the balance sheet and how you can interpret them.
Let’s get started!
What is an exceptional item?
If you look for the December 2020 quarter, for the Pharmaceutical company Aurobindo Pharma, you’ll notice a Rs. 2,946 crore gain. In just one quarter! Especially, when the previous quarter gain was just Rs. 705 crores.
So, what does this mean?
Did Auro Pharma increase their profit by 4x, where other pharmaceutical companies had business as usual? Or is this just a one-time thing?
In this case, it was the latter.
Here’s what happened – the company disposed of the asset of one of their own subsidiaries called Natrol LLC. They were sold off for a gain of almost Rs. 3,094 crores. Now, after deducting tax and additional costs, the company was left with a Rs. 2,946 crores in profits, wherein they mentioned that the sale was made with a debt reduction objective and to take on new strategic initiatives. They also thought they needed some restructuring with their investments. This is what we call an exceptional item in the financials. It can be anything like the sale of an investment, an asset or just a sudden change in government policy that impacts the earnings of the company.
How should we interpret exceptional items?
In this case, a 400% jump in the earnings isn’t something that happens all the time or just happens overnight by miracle. The jump was only caused by an exceptional event, which in this case was the sale in the subsidiary. So, every time you analyse the financials, don’t just burst out in happiness. If you see figures like these, try and find the reason behind them. It will make sure that you don’t buy into the hype.
Can you let us know in the comments of any other exceptional events that you can think of?
That’s it for now. Thank you so much for watching our video on exceptional items in our series, Learn with Upstox. I hope you learned something today.
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