What it means
Statutory profit is prepared under accounting rules and is comparable across companies, but it mixes everyday trading with events that will not repeat. Underlying profit, also called adjusted or normalised profit, tries to isolate the recurring part so that this year can be compared fairly with last year.
Managers and analysts use it because it answers a genuinely useful question. If a business closed a factory once, paid a legal settlement once and sold a building once, none of those tells you much about how the core operation will perform next year.
The calculation starts from the statutory figure and applies add-backs and deductions. Costs treated as one-off, such as restructuring, impairment and acquisition fees, are added back, while one-off gains such as a profit on disposal are deducted, and the result is normally reported alongside the statutory number with a full reconciliation.
The obvious risk is that management chooses its own adjustments. A company that reports exceptional restructuring costs every single year is describing a recurring cost of doing business, and adjustments that only ever flatter the result should be treated with suspicion.
Regulators have responded by requiring that statutory measures be given equal or greater prominence and that every adjustment be reconciled and explained. For a non-finance reader the practical rule is simple: read both numbers, and pay attention to how far apart they are and to whether that distance is closing or widening.
In practice
Real-world examples.
Example
A retailer closes 30 stores and reports statutory profit well below the prior year. It presents underlying profit excluding closure and lease exit costs so shareholders can see that like-for-like trading in the remaining stores actually improved.
Example
A software company excludes $8,000,000 of share-based payment charges from its underlying profit. Some investors accept this because no cash leaves the business, while others object that shares issued to staff are a genuine cost borne by existing shareholders.
Example
An acquisitive group excludes $6,000,000 of amortisation of acquired customer relationships from underlying profit, arguing the charge reflects past purchases rather than current trading. Sceptical analysts point out that the group buys companies every year, so the charge is effectively permanent.
Formula
Calculation
Underlying profit = statutory operating profit + non-recurring costs - non-recurring gains.
A group reports revenue of $120,000,000 and statutory operating profit of $18,000,000. Within that figure sit restructuring costs of $4,000,000 from closing two sites, an impairment of $2,500,000 against an acquired brand, and $900,000 of professional fees on a completed acquisition. It also booked a $1,400,000 gain on selling a surplus warehouse.
Underlying profit is $18,000,000 + $4,000,000 + $2,500,000 + $900,000 - $1,400,000 = $24,000,000.
The statutory operating margin is $18,000,000 / $120,000,000 = 15%, while the underlying margin is $24,000,000 / $120,000,000 = 20%. Both are true; the first says what happened, the second says what trading looked like without the one-off items, and an investor should ask how likely those items are to recur.Case study
Seen in the real world.
Merrow Group is a fictional illustration of a listed industrial services company that reported underlying profit of $24,000,000 in each of three consecutive years, presenting a picture of steady performance. Over the same three years its statutory profit was $18,000,000, then $11,000,000, then $9,000,000.
The gap was filled by restructuring charges that appeared every year under a different programme name, plus recurring acquisition costs from a rolling buy-and-build strategy. An institutional shareholder pointed out at the annual meeting that a cost incurred three years running is not exceptional; it is how Merrow operates.
The illustrative outcome was that Merrow changed its presentation, treating acquisition costs as ordinary operating expenses and restricting adjustments to genuinely unusual items. Reported underlying profit fell sharply, but the gap to statutory profit narrowed and analyst confidence in the number recovered.
Watch out
Common mistakes.
- Comparing one company's underlying profit with another's, when each defines its own adjustments and the two measures are not built the same way.
- Accepting recurring restructuring or acquisition costs as exceptional simply because the company labels them that way.
- Treating underlying profit as a cash measure, when it is an earnings figure that can sit a long way from the cash the business actually generated.
Questions
People also ask.
Is underlying profit audited?
The statutory accounts it is derived from are audited, but the adjusted measure itself usually is not, so the reconciliation matters more than the headline.
How is it different from EBITDA?
EBITDA strips out interest, tax, depreciation and amortisation by a fixed rule, whereas underlying profit strips out whatever management judges to be one-off, which is far more discretionary.
Which number should a manager use for a bonus target?
Statutory profit is harder to argue with, so if an underlying measure is used the adjustments should be defined in advance and approved independently rather than decided after the year end.
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