PROFIT FIGURES

MAKING SENSE WITH FIGURES

“…..our profit before tax has gone up with 60 percent in this trading period our revenue was 80% up while our costs have gone up by 40 percent……”

These are words we mostly hear from CEOs announcing results of their companies after a trading period; usually one year. This is usually followed by an explanation to justify the results while outlining performance projections in the coming trading period.

These results are normally attributed to aggressive expansion, cost control measures, macroeconomic environment, changes in foreign currency, increased cost of fuel among other reasons. These reasons are used to show the public the way these teams-even loss-making companies- are working tirelessly to improve performance. After the results are announced, the media picks up from there and transmits to their audience as business news.

In many instances, the media coverage is inaccurate; without careful analysis or reporting.

Businesses invest heavily to generate these reports and figures. These costs are even higher in listed firms and banks due to regulations and the disclosure required by their regulators. Accountants sit at their desks to generate these figures and compile reports which are supposed to be relevant to their intended users and help in their decision making. In this information age, their work is made easier by computers and softwares that can generate them faster with more accuracy, but are they worth anything? Do we really need all these reports as investors, managers, regulators and general public?

However, how many people make use of these figures or are able to get the information they need most? It is useless to hire the best accountant to give you these figures which don’t give any insight in you or you don’t even know the right information you need most. For a bank, which figure is most important? Is it the pretax profit, total cost, assets, customer deposits, their number of accounts or amount of loans disbursed? All these are important, but the number of customers an institution has indicates a deeper understanding in the business regardless of their contribution to your profits. Just have a look at @Safaricom and @Equity Bank financial statements and the number of customers they have in their businesses, that is not coincidence

Have a look at this table tabulating banks results for 2011 in million Ksh

	EQUITY	KCB	STAN CHART	BARCLAYS
PROFIT BEFORE TAX	12,679	15,103	8,251	12,012
ASSETS	196,294	330,716	164,182	167,305

Let’s try to make sense with these pre-tax profits and total assets figures.

Note total loans is part of the bank’s assets

PERFORMANCE  BY PROFITS				PERFORMANCE BY TOTAL ASSET
KCB	15,103			KCB		330,716
EQUITY	12,679			EQUITY		196,294
BARCLAYS	12,012			BARCLAYS		167,305
STAN CHART	8,251			STAN CHART		164,182

These figures make more sense as you can now compare the amount of profits and total assets. It appears @KCB has the highest profits and total assets, so who is doing better?

Now let make more sense

PERFORMANCE BY USE OF ASSET (AMOUNT GENERATING A SHILLING OF PROFIT )
BARCLAYS	14
EQUITY	15
STAN CHART	20
KCB	22

Now the figures become more useful and meaningful in the decision you want to make.

Despite KCB leading in profits, is it efficient in making good use of its assets?

Assuming all the banks increase their assets to match that of KCB of KSH 330,716m

AT KSH 330,716M IN ASSETS
BARCLAYS	23,744
EQUITY	21,362
STAN CHART	16,620
KCB	15,103

I am NOT suggesting that KCB is a bad performer because there are so many indicators to gauge a bank performance, bank health and growth strategies. If you factor in the income from sale of custodial business to @Standard Chartered in @Barclays Bank profits, Equity Bank will be on top.

If you need figures on a business to derive a strategy, you need first to know which one is more important and which one is more meaningful. In a supermarket do you need the number of shoppers who visited your store in a day or total sales in a day regardless of how many bought to derive a profit growth strategy? In addition need to figure out how long a customer stays in the supermarket and how many customers entered your store and walked out without buying anything before thinking of profits.

All numbers and reports generated in business is as importance as the much you derive any meaning from them, otherwise useless.