A Very Quick Look at Rio Tinto's Earnings

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LONDON -- Right now I'm trawling through the FTSE 100 and double-checking for blue chips that may be flattering their profits.

You see, many companies these days report "underlying" earnings, which are calculated by excluding costs the firm deems to be "exceptional." The trouble is that some companies are more cavalier than others when it comes to sweeping awkward expenses away from the headline figures.

Today I'm looking at Rio Tinto (ISE: RIO.L) (NYS: RIO) to see if its reported earnings have been distorted significantly by exceptional, one-off, or unusual items. I've extracted the following statistics courtesy of S&P Capital IQ:

 

2007

2008

2009

2010

2011

Profit Before Unusual Items (millions of pounds)

4,850

9,934

4,858

13,004

14,858

Impairment of Goodwill (millions of pounds)

-

1,532

428

482

119

Asset Writedowns (millions of pounds)

(29)

(5,501)

(974)

(629)

(5,894)

Gain of Sales of Assets and Investments (millions of pounds)

128

336

553

334

(323)


While annual figures can provide some insight into how a business has performed, I reckon that looking back over several years provides a better view of possible problems relating to one-off costs. So, between 2007 and 2011, my stats tell me Rio Tinto reported cumulative profit before exceptional items and tax of 47.5 billion pounds. However, aggregate exceptional costs came to 9.4 billion pounds -- equivalent to a significant 20% of cumulative "underlying" profit.

Seeing a whole one-fifth of profit swallowed up by exceptional items is a pretty alarming statistic. And the cause can be summed up in one word: aluminum.

Rio Tinto bought Alcan in 2007 for $38 billion, merging it with its own aluminum operations. With the benefit of hindsight, it massively overpaid -- and it has since taken two massive writedowns on the value of these assets. Although Rio Tinto is now the global leader in aluminum, profit margins in recent years have been wafer-thin compared with those of other major metals.

This item aside, Rio Tinto's profit and loss account looks relatively clean. So the lesson from this quick analysis is clear: Be wary of big acquisitions!

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The article A Very Quick Look at Rio Tinto's Earnings originally appeared on Fool.com.

Stuart does not own any share mentioned in this article. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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