What Are Headline Earnings?
Let me explain headline earnings to you directly: it's a way to report a company's earnings based solely on what happened in operations, trading, and capital investments during the last period. You won't see profits or losses from selling or shutting down discontinued operations, fixed assets, or related businesses in this figure, and it also leaves out any permanent devaluations or write-offs of those values.
Key Takeaways
- Headline earnings report a company's income from operations, trading, and investments only.
- Headline earnings therefore exclude certain one-time or exceptional items such as write-offs.
- Analysts look to headline earnings as a basis for how a company is operating at its business as usual capacity.
Understanding Headline Earnings
You should know that headline earnings serve as a strict tool to pinpoint core operational profitability. By leaving out things like asset sales, discontinued operations, restructuring charges, and write-downs, this number reveals the profitability of a company's main business. Since headline earnings make these exclusions, they give you a clearer view of how the company runs on an ongoing basis—those one-time charges or special items that probably won't repeat can distort the real picture of operations. That said, these excluded items still matter to analysts, particularly if they keep happening or affect future outlook significantly.
Some companies provide headline earnings per share (EPS) alongside the required EPS figures that include those other items. Because headline earnings ignore them, they're considered non-GAAP, and if they're in shareholder reports, they must be reconciled with net income per SEC regulations.
This approach to calculating headline EPS started in 1993 with the former Institute of Investment Management and Research (IIMR) in the United Kingdom. The IIMR created it to analyze a company's profit and loss statement more effectively, offering a view that better shows operations during 'business as usual,' which might otherwise be obscured by a one-time charge or write-off.
Criticism of Headline Earnings
The quality of a company's earnings matters, so as an investor, you need to evaluate the validity of headline earnings and their exclusions case by case to avoid getting misled. Research indicates that headline figures tend to exclude losses more often than gains. Now, GAAP earnings are trailing far behind non-GAAP ones because companies are getting used to adding 'one-time' adjustments or charges, which becomes an issue when they happen every quarter.
Take Merck (MRK) as an example: in the third quarter of 2017, they reported a GAAP loss of $0.02 per share but turned it into an 'adjusted' headline EPS of $1.11 per share—a difference of 5,650%.
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