Cash EPS

After a large acquisition, reported earnings carry a charge for amortising intangibles that the target never had on its own balance sheet. Cash EPS strips that charge out, on the argument that it is non cash, that its size is the output of a valuation exercise and that the useful life behind it is a judgement.

The argument against is equally serious. The cash was spent once, in full, at completion, so excluding the charge in every year afterwards presents acquired customer relationships as if they were free. A company that acquires continuously is excluding a permanent feature of how it operates, not an exceptional item.

Practice varies and it is worth saying so rather than picking a side. Most European institutional investors will look at a cash earnings figure while watching whether the acquirer ever stops buying, and credit agreements usually permit the add back explicitly because lenders care about cash rather than book profit.

The disciplined answer in an interview is to present both, name which effects are cash and which are not, and note that the same logic does not extend to everything management would like to exclude. Restructuring that recurs every year, for instance, is a cost base rather than an exception.