What is a single charge?
A one-time charge, in business accounting, is a charge on a company’s earnings that company executives expect to be an isolated event and is unlikely to recur. A single charge can either be a cash charge against revenue such as the cost of paying severance payments to terminated former employees or a non-monetary charge such as the to write the value of assets such as real estate whose market value has fallen due to changes in business fundamentals or consumer preferences.
Financial analysts routinely exclude one-time costs when assessing a company’s ongoing profit potential.
Key points to remember
- A point charge is a one-time event that results in an isolated charge or radiation.
- One-time charges generally do not reflect long-term financial performance, so many companies report pro forma earnings that exclude the impact of these charges.
- Some businesses incorrectly record charges they incur repeatedly in the course of their normal business activities as one-time charges.
- Stock prices have demonstrated a tendency to suffer significantly during periods of frequent point loads, as this could be a red flag.
Understanding One-Time Fees
Some point loads only occur once. In such a case, they should not reoccur and would not impact a company’s performance and long-term growth. Accordingly, they may be excluded from proforma financial statements or labeled as a extraordinary article.
However, some businesses mistakenly record charges they incur repeatedly in the course of their regular business activities as one-time charges. This practice can make the company’s financial health appear better than it actually is, and it is a practice that investors should be aware of.
Many consider this practice a dangerous trend. Some companies even use restructuring charges as a way to improve future earnings and profitability. By taking large restructuring charges, companies reduce depreciation in future periods and thus increase their profits. This is accentuated when profitability is measured on a yield basis since the book value of capital and equity is also reduced by significant restructuring charges.
Thus, many analysts view the one-off charges with skepticism, and adjustments should reflect what they see. If the one-time charges are truly operating expenses, they should be treated as such and the revenues estimated after these charges. If the one-time charge is in fact a one-time charge, revenue should be estimated before that charge.
However, when it comes to calculating the return on equity and capital, a more reliable estimate can be obtained if the book value of equity and capital is estimated before extraordinary charges, not only in the current period , but cumulatively over time.
The most problematic charges for a company in the context of its stock market price are those related to the restructuring of discontinued operations.
Example of one-time billing
For example, Acme Technology Company may properly to write costs related to the restructuring of its file server business as one-time charges. However, if the company also writes inventory every two quarters and reports these charges as one-time charges, it is far from clear that these inventory write-down charges are truly one-time charges and Acme’s financial situation may be somewhat different from what investors and analysts are led to believe by the company.
Special Considerations
While financial analysts may overlook one-time charges when making their judgments about a company’s earnings, stock prices aren’t that forgiving. In fact, stock market returns have shown a tendency to suffer significantly during periods of frequent one-off loads.
Thus, it is important for anyone researching a particular action, which has been subject to a unique charge, to understand the nature of each unique charge. They are not all equal in the eyes of the investor or the analyst. Some charges represent good business decisions made by the company. Others may reflect that the company’s finances are catching up with past negative events.