What Is a One-Time Charge?
A one-time charge is a charge against a company's earnings that the company's managers say they expect to be an isolated event that they expect is unlikely to occur again. A one-time charge can either be a cash charge against earnings such as the cost of paying severance expenses to laid-off former employees or a non-cash charge such as the writing down of the value of assets such as a piece of real estate whose market value has fallen due to changes in business fundamentals or consumer preferences.
Financial analysts routinely exclude one-time charges when they evaluate a company's ongoing earnings potential.
The charges that are the most problematic for a company in the context of its stock prices are those related to restructuring for discontinued operations.
Understanding One-Time Charge
Some one-time charges do indeed only take place once. However, many companies incorrectly record charges that they repeatedly incur in the course of their usual business activities as one-time charges. This practice may make the company’s financial health look better than it really is, and it is a practice that investors should be aware of.
Many consider this practice to be a dangerous trend. Some companies even use restructuring charges as a device to improve future earnings and profitability. By taking large restructuring charges, firms reduce depreciation in future periods and thus increase earnings. This is accentuated when profitability is measured on a return basis since the book value of capital and equity is also reduced by large restructuring charges.
Thus, many analysts regard one-time charges with skepticism, and the adjustments should reflect what they see. If the one-time charges are really operating expenses, they should be treated as such and earnings estimated after these charges. If one-time charges are actually one-time charges, earnings should be estimated prior to these charges.
When it comes to computing return on equity and capital, however, a more reliable estimate may be obtained if the book value of equity and capital are estimated prior to extraordinary charges, not just in the current period but cumulatively over time.
One-Time Charge Example
For example, Acme Technology Company may properly write off costs related to restructuring its file server business as a one-time charge. However if the company also writes down inventory costs every other quarter and reports these charges as one-time charges, it is less than clear that these inventory write-down charges are truly one-time charges and Acme’s financial circumstances may be somewhat different than investors and analysts are being led to believe by the company.
- A one-time charge is a charge against a company's earnings that the company expects to be an isolated event that is unlikely to happen again.
- Many companies incorrectly record charges that they repeatedly incur in the course of their usual business activities as one-time charges.
- Stock prices have demonstrated a tendency to significantly suffer during periods of frequent one-time charges.
While financial analysts may disregard one-time charges when making their judgments on a company's earnings, stock prices are not so forgiving. In fact, stock returns have demonstrated a tendency to significantly suffer during periods of frequent one-time charges.
Thus, it's important for anyone researching a given stock, which has been subjected to one-time charges, to understand the nature of each one-time charge. They are not all equal in the eyes of the investor or analyst. Some charges represent good economic decisions by the company. Others may reflect the company's finances catching up with past events.