The good, the dangerous and the ugly of earnings statements | USAEMALL.com

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Can you tell a “value-compounding business model” from a “medium-term growth algorithm”? Do you know the difference between CVRM and UVG? If not, it might be time to brush up on your corporate-speak and company abbreviations: earnings season is upon us.

Earnings statements are a staple of corporate communications, a twice-yearly (or sometimes quarterly) opportunity for a company to update the world on how things are going, future plans, and strategy changes. It’s a key chance for listed companies to present themselves to existing and potential shareholders as well customers or employees.

February and July are particularly busy periods as companies whose financial year ends in December put out their full-year or half-year numbers. This month we’ve had a slew of big names around the world reporting their results, from GSK and Qualcomm to Coca-Cola and Société Générale.

The best earnings statements give a clear explanation of what has happened and why, which can be understood by anyone who picks them up. UK-based retailer Next is often seen as a model — its annual and half-year results statements, written in straightforward language, explain the wider business environment, the company’s performance and future plans.

Finnish energy group Neste did a good job earlier this month. It won’t have made pleasant reading for investors — the company had a tough year and profits fell sharply. But chief executive Heikki Malinen’s statement explained clearly what had gone wrong, why it had gone wrong and what the company proposed to do about it. “In Neste’s current situation, it is obvious that a change of direction is needed,” he said.

Too often though, companies lapse into corporate jargon. While that may be a comfortable place for executives and their advisers, it is less so for anyone on the outside. This month, defence group BAE Systems told investors about the “sustainability of our value-compounding business model” while tobacco group BAT spoke at length about its “medium-term growth algorithm”. It’s hard to believe that there are not more straightforward ways for either company to explain itself.

Abbreviations also abound. Consumer goods group Unilever has a prominent table in its results with percentage changes to turnover explained in terms of USG, UVG, UPG and A&D. The terms are not defined until pages 12 and 14 of the statement. Similarly, high up on its results statement, pharma group AstraZeneca talks about revenue growth from divisions including CVRM, R&I and V&I. There’s no explanation of what these abbreviations stand for until a glossary on page 47. CVRM, for example, refers to cardiovascular, renal and metabolic. And the UVG of Unilever stands for underlying volume growth.

But at least these definitions are findable for those willing to look. A more serious issue is the use of companies’ own performance metrics when presenting results, from underlying ebitda to more exotic, company-specific measures. Executives say that this is how they manage the business, and so it makes sense to explain it to investors in the same terms. Investors complain that it is difficult to reconcile the picture painted by the company’s own metrics with the (often less rosy) picture shown in the formal IFRS accounts. They also suspect that some companies frequently adjust the definitions of these metrics to suit their short-term needs.

Underlying a lot of these issues is that results statements are often written for people who know the company well already: a small group of investors and sell-side analysts who have met management, understand the jargon, and developed their own financial models. Only they will understand the nuances of exactly what a particular company might mean when it says, for example, that growth will be “significant” or “reasonable” or “modest”. But anyone not in that small group is less likely to get the message, and so be alienated. Is that really what the companies want?

There is help coming on some of these issues. A new accounting standard, IFRS 18, will from 2027 introduce new requirements on how companies use their own performance measures, and make them subject to audit. But even with that in place, companies will have plenty of freedom when it comes to presenting their performance in an earnings statement. It’s up to them to make it something that people might actually want to read, rather than an exercise that investors have to revise for in advance.

oliver.ralph@ft.com