Earnings watch: A discussion of "profits"

Aldar Properties and Sorouh Real Estate, the capital's two largest developers, released their earnings reports for the first three months of the year this week. Aldar reported profits of Dh888.6 million (US$241.9m) and Sorouh reported Dh130.4m of profit in the first quarter.

However, analysts have directed me toward an important differences. While Aldar claimed Dh919m in profit from land revaluations, Sorouh does not include land revaluation as profit.

Land revaluation is basically what happens when a developer brings in property analysts to determine the value of their land bank based on a variety of factors, like sales of similar property in the area, infrastructure, and location. The gain (or loss) in valuation is then counted a profit, while no cash is actually added to the company's balance sheet (It is considered a fair accounting standard to include revaluation in profits, but it does make for some interesting analysis when you drill down to the numbers).

Shafqat Malik, Aldar's chief financial officer, says that the company considers land that it is not yet developing as "investment property" and therefore revaluation is a legitimate way of measuring profit. If you remove Aldar's revaluation profit this last quarter, it had only Dh14.2m of "net operating profit" - profit made from cash generating items.

On the other hand, Paul Warren, Sorouh's chief strategy officer, says his company does not count revaluation because it does not show the real profit of the company - i.e., how much cash it is bringing in because of rentals, actual sales, and other business activities.

It is an interesting debate. Do revaluations conceal what is actually happening with a company during this more difficult period in the market?