How does one view "non-recurring items" in financial statements?

Sure, here is the translation of the provided content into English, maintaining the markdown format and adhering to standard usage:

Answer: Fine, let's talk about this thing called "non-recurring items" in plain language. This stuff is pretty important in financial reports, and it can be risky if you're misled by it.

Unmasking the "Costume" of "Non-Recurring Items" to See a Company's Profit "Unretouched"

Imagine a small restaurant opened downstairs by your friend.

• First month: The restaurant earned a hard-won 10,000 RMB from selling lunches and stir-fries. This is its core operating profit.
• Second month: The restaurant business was the same, earning 10,000 RMB. But coincidentally, due to urban redevelopment that month, the government gave the restaurant a 50,000 RMB relocation subsidy. So, looking at the books, it “made” 60,000 RMB this month!

If you wanted to invest in this restaurant, which number better reflects its true earning power? The steady 10,000 RMB? Or the suddenly appearing 60,000 RMB?

The answer is obviously 10,000 RMB. Because selling food is what the restaurant can keep doing consistently, while the relocation subsidy might be a once-in-a-lifetime event.

That 50,000 RMB "relocation subsidy" belongs to "non-recurring items" in a company's financial statements.

So, what are "Non-Recurring Items"?

Simply put, they are income or expenses that aren't closely related to the company's main business, occur infrequently, and aren't sustainable. They're like "windfalls" or "unexpected disasters" in life.

Common types of "non-recurring items" include:

• Selling off assets: A company sells its factories, land, or equipment. The sale might be very profitable, but once sold, it's gone – you can't sell the same factory again next year!
• Government "red envelopes": These are various subsidies from the government. Some might come every year, but policies can change suddenly – it's never as reliable as earning money from selling your own products.
• Stock market/Investment gains: The company uses spare cash to trade stocks or buy financial products, or invests in another company and makes a big gain by selling that investment. This has little to do with the company's own products or services and is usually very volatile.
• Windfalls/Liability: For example, a company wins a lawsuit and gets compensation, or loses a lawsuit and pays out a large sum. These are also typically one-off events.

Why Should We Pay Special Attention to This Stuff? (And What Would Benjamin Graham Say?)

This is the real heart of the matter and something value investing legends like Benjamin Graham emphasized repeatedly.

1. It's the "Beauty Filter" for Profits

Often, a company's core business might already be struggling – growing weakly or even losing money. But to make their financials look good and give investors the illusion that "we made a lot of money this year," they might rush to sell an unused office building right before year-end, or find a way to get a government subsidy.

This makes the "Net Profit" figure on the income statement look fantastic. But if you believe this number, it's like looking at a heavily photoshopped influencer picture – you have no idea what the real person looks like. These "non-recurring items" are that thick layer of filter.

2. We're Looking for "Sustainable Profitability"

As smart investors investing in a company, we're ultimately investing in its future earning power. What we want are companies that, like a productive hen, lay eggs consistently and predictably, not companies that rely on "manna from heaven" just to survive.

"Non-recurring items," by their very nature, are unsustainable. Therefore, Graham taught us that when analyzing a company's profitability, we must ruthlessly strip out these "exceptional" items to see how much money the company actually earns from its core operations.

The profit figure remaining after stripping out non-recurring items has a specific term in Chinese stock market (A-shares) financials: "Net Profit Excluding Non-recurring Items" (Adjusted net profit, or "Kou Fei Jing Li Run"). This is the company's profit "unretouched" – though it may not look glamorous, it's real.

How Do We See This in Practice?

1. Find it: In a full annual report, you can usually find a table called the "Schedule of Non-recurring Items" below the income statement or in the financial notes. It clearly lists all the one-off gains and losses for that year.
2. Compare the figures: Look at both the "Net Profit" and the "Adjusted Net Profit (Excluding Non-recurring Items)".
   • If they are roughly the same, it means the company's profits are "clean," primarily driven by its core business. This is a good sign.
   • If "Net Profit" is significantly larger than the "Adjusted Net Profit," beware! This indicates most of the profit comes from windfalls, and the core business might be weak.
   • • If "Net Profit" is significantly smaller than the "Adjusted Net Profit," it means the company was hit by a one-off loss. In this case, it's worth checking if the core business might still be decent, and the poor headline number is just due to a temporary event.
3. Ask "Why?":
   • If a company has large "non-recurring items" year after year, how "non-recurring" are they really? This itself signals problems, suggesting the company might be consistently relying on asset sales or subsidies to get by.
   • When did these items occur? Do they always happen close to year-end? This timing could indicate an intention to window-dress the accounts.

To Summarize

Remember this: "Non-recurring items" are "noise" in the company's financial statements. Our task is to filter out this noise to clearly hear the primary theme – the company's core business.

When evaluating a company's profits, never just focus on the shiny "Net Profit" figure. Always take a good look at the more down-to-earth, genuine "Adjusted Net Profit Excluding Non-recurring Items" ("Kou Fei"). This helps you avoid many "too-good-to-be-true" traps and gets you closer to the essence of investing – finding truly good companies with strong, sustainable, long-term earning power.