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QuestionsCategory: Financials QuadrantFinancial Quadrant – Extraordinary Item
Wilfred Yang asked 1 year ago

Hi,
I have two questions relating to the extraordinary item which had been defined as “Extraordinary items or exceptional items are one-off gains (or losses) which are not part of the company’s ordinary business operations.”
Q1: As part of the calculation, you had included interest income and interest expense as extraordinary items. Why is this so? While interest income and interest expense are not part of alphabet’s ordinary business operations, they are not one-off. Loans will still have to be serviced in the form of interest expense until they are paid off, and interest income will continue to come in as long as Alphabet hold onto any interest bearing financial product.
Q2: The European Commission Fine is not for perpetuity. This is actually a real one-off loss. Why isn’t this added back to the net income?

Jieren Zheng replied 1 year ago

For Q1, I would think we are trying to see their earnings power from their operations which is why we want to adjust for interest (like how businesses use EBIT, earnings before interest and taxes). Alphabet has a rather sizeable cash hoard if I do remember correctly as well.

Victor Chng replied 1 year ago

Thanks JR

1 Answers
Victor Chng answered 1 year ago

Hi Wilfred,
 
Q1: I am usually quite conservative i=with financial numbers. I do put interest income as extraordinary item while excluding interest expense. By doing so, I usually have lower net profit figure. Then again, interest income & interest expense are usually a small figure in the business hence if you don;t want to include them as one-off item. It is still fine. 
 
Q2: For the European commission fine, I am being conservative on our end as big tech companies are consistently being questions by government of different countries. Hence, I did not remove it as assume it as recurring. It really depend on how conservative you want to be. If you add back the EU fine then the IV calculated out will be much higher.