A GAAP vs. Non-GAAP Assessment

Educational Reference Material: Non-GAAP – The Pragmatic Approach To Earnings Analysis

Main Point: On December 27, 2023  Swvl Holdings Corp (NASDAQ:SWVL) issued a press release, reporting first half 2023 financial results and GAAP net income of $2.1 million. We believe the company should have also presented non-GAAP net income, adjusting for certain financial statement items that would have resulted in the company reporting an adjusted loss of $2.6 million. The adjustments we made would also translate into an operating loss. Retail investors may just be referencing the GAAP numbers, resulting in the stock’s 405% post-earnings price increase.

We currently have no position in SWVL, nor are we suggesting that this research be used as grounds to initiate any sort of position in the stock. Furthermore, the stock has only 7 million shares outstanding and appears to be in pump mode.

SWVL’s price soared as much as 405% higher to a peak price of $4.90 in the days following its December 27 earnings release, when it reported 2023 first half results showing a $2.1 million GAAP profit, translating to EPS of 25 cents. This reversed a large loss versus the prior year’s comparable period. Sales fell 48% to $11.1 million. Shares closed at $4.54 yesterday, still up 368% since its earnings release. Today, they are up again.

The company had been losing a sizable amount of money prior to going public via a SPAC transaction with Queen’s Gambit Growth Capital on April 1, 2022. And they continued to do so after the listing.

The introductory bullets and main comment area of the earnings press release omitted a discussion on certain line items (income, expenses and non-cash items) that were present in the company’s financial tables that we consider non-recurring.

We believe investors would find the line items we used to adjust GAAP net income as important factors to diagnose the health of the company and conclude that the reported GAAP net income may not be an accurate representation of the company’s future earnings power.

PR Comments:

“The Company has achieved positive operating cash flow and net profits, which it believes demonstrates the successful completion of the portfolio optimization program initiated last year, off the back of the global economic and capital markets environment at the time. Swvl aims to maintain and further boost profitability while resuming its enhanced strategic expansions to high revenue markets.”

Key highlights from Swvl’s H1 2023 financial report include:

• Operating Cash Flow: Operating cash inflows of $2.2 million in H1 2023, compared to operating outflows of $76.8 million in H1 2022. 
• Gross Profit: Gross profit of $1.8 million in H1 2023, compared to gross loss of $2.7 million in H1 2022. 
• Operating Profit: Operating profit of $13.4 million in H1 2023, compared to operating loss of $56.0 million in H1 2022. 
• Net Profit: Net profit of $2.1 million in 2023, compared to net loss of $161.6 million in H1 2022. 
• Total Equity: Total equity book value of $5.0 million as of 30 June 2023, compared to total equity of $2.6 million as of 31 December 2022 (total deficit of $24.5 million as of 30 June 2022).

“This achievement underscores the Company’s commitment to financial stability, operational efficiency, and profitable growth initiatives implemented throughout the fiscal year. The successful transformation to positive cash flow and profitability is pivotal for Swvl’s enhanced strategic expansions to high revenue markets.”

Adjusting GAAP net income for these line items in the actual financial tables would translate into an adjusted or non-GAAP loss of $2.6 million. 

*Red: Subtract from GAAP net income
*Green: Add to GAAP net income

Although SWVL’s balance sheet has improved due to a $12 million asset sale ($9.5M up front, $2.5M over one year) announced on September 12, 2023, the stock did not move on that news.  

Thus, we believe the sharp rise in shares could be due to investors taking the company’s reported profitable first half 2023 GAAP net income at face value, while at the same time being unaware of some non-recurring financial line items that helped the company show a GAAP profit. 

While management did not violate reporting standards, we believe they should have been more transparent by including adjusted net income and operating income figures in the press release bullets, press release verbiage and in a reconciled table.