What Are Non-GAAP Earnings?
Let me explain non-GAAP earnings directly to you: they're an alternative way companies measure their earnings, often reported alongside the standard GAAP figures. These pro forma numbers exclude what companies call 'one-time' transactions, like major restructurings, which might give you a better sense of the ongoing business operations. But you have to be cautious—companies might use them to paint a rosier picture by consistently leaving out costs that hurt their GAAP results.
Understanding Non-GAAP Earnings
First, you need to grasp GAAP earnings, which are the standardized rules everyone uses for consistent financial reporting, especially for public companies. Companies justify non-GAAP by saying big one-off expenses, like asset write-downs, aren't part of normal operations and skew the real performance. So, they adjust for things like EBIT, EBITDA, adjusted revenues, free cash flows, core earnings, or funds from operations. When done right, this can show you the true value of the core business. But remember, there's no regulation on non-GAAP EPS, so you can't always tell if it's straightforward or manipulated to trick algorithms or investors.
Key Takeaways
- Non-GAAP earnings are an alternative method to measure company earnings, excluding one-time events like restructurings.
- They can offer a more accurate view of direct business performance compared to GAAP.
- Investors must watch for misleading reports where companies repeatedly exclude negative impacts on GAAP earnings.
Criticism of Non-GAAP Earnings
You should consider the quality of earnings carefully—look at non-GAAP exclusions case by case to avoid deception. Research shows these adjustments often exclude losses more than gains, and GAAP earnings are falling behind non-GAAP as companies get hooked on these 'one-time' tweaks that happen every quarter. Take Merck's example: they turned a GAAP loss of -$0.02 per share into an adjusted profit of $1.11—a massive difference. Don't ignore GAAP; it's there for consistency and comparison across companies and time. That's why the SEC mandates it upfront and is cracking down on companies, especially in tech, that highlight non-GAAP more than GAAP due to things like stock comp, impairments, and R&D costs.
Other articles for you
The Arab League is a regional organization of 22 Arabic-speaking countries aimed at promoting their independence, economic growth, and political stability.
Rent control is a government program that limits landlord rent charges to keep housing affordable, though it's controversial and limited in the US.
A Right of First Offer (ROFO) allows a holder to make the initial bid on an asset before it's offered to the open market.
An ASCOT separates a convertible bond into its fixed-income and equity components to isolate equity exposure without credit risk.
The Bitcoin Misery Index (BMI) is a contrarian indicator measuring investor sentiment through winning trades and volatility to signal buying opportunities when misery is high.
This article ranks and describes the five largest sovereign wealth funds by assets under management.
The floor area ratio (FAR) is a zoning tool that measures building density by comparing usable floor space to lot size, influencing urban planning and property values.
Objective probability relies on data and facts for accurate event likelihood, unlike subjective probability which uses intuition and personal experience.
IRS Form 8606 is used to report nondeductible contributions to IRAs and handle related tax implications like distributions and conversions.
A holographic will is a handwritten document signed by the testator that serves as an alternative to a lawyer-drafted will, recognized in certain states with specific validity requirements.