What Are Non-GAAP Earnings?

Non-GAAP earnings are an alternative accounting method used to measure the earnings of a company. Many companies report non-GAAP earnings in addition to their earnings based on 澳洲幸运5官方开奖结果体彩网:Generally Accepted Accounting🐈 Principles (GAAP). These 澳洲幸运5官方开奖结果体彩网:pro forma figures, which exclude "one-time" transactions, can sometimes provi📖de a more accurate measure of a company’s financial performance from direct business operations.

However, investors need to be wary of a company's potential for misleading reporting which excludes items that have a negative effect on GAAP earnings, quarter after quarter.

Understanding Non-GAAP Earnings

澳洲幸运5官方开奖结果体彩网:To understand non-GAAP earnings, it's important to understand G𝓀AAP earnings. GAAP earnings are a common set of standards accepted and used by companies and their accounting departments. GAAP🧔 earnings are used to standardize the financial reporting of publicly traded companies.

The justification for reporting non-GAAP earnings is that large one-off costs, such as asset write-downs or organizational restructuring, should not be considered normal operational costs because they distort the true financial performance of a company. Therefore, some companies provide an 澳洲幸运5官方开奖结果体彩网:adjusted earnings number that excludes these nonrecurring items. Commonly used non-GAAP financial measures include 澳洲幸运5官方开奖结果体彩网:earnings before interest and taxes (EBIT), earnings before interest,🍬 taxes, depreciation, and amortization (EBITDA), adjusted revenues, free cas⛄h flows, core earnings, and funds from operations.

When used appropriately, these non-GAAP financial measures can help companies provide a more meaningful picture of the company's performance and value. Presenting only the financial results of the core business activities can be useful. However, there are no regulations around non-GAAP 澳洲幸运5官方开奖结果体彩网:earnings per share (EPS). Investors have no way of kn🍨owing whether Non-GAAP EPS figures are genuine or✅ manipulated in an attempt to deceive the automated news-watching trading algorithms into taking action as the results are published in headlines.

Criticism of Non-GAAP Earnings

A company's 澳洲幸运5官方开奖结果体彩网:quality of earnings is important, so investors need to consider the validity of non-GAAP exclusions on a case-by-case basis to avoid being misled. Studies have shown that adjusted figures are more likely to exclude losses than gains. GAAP earnings now significantly trail non-GAAP earnings, as companies become addicted to “one-ꦕtime” adjustments, which become meaningless when they happen every quarter. Merck, for example, turned a loss of -$0.02 per share under GAAP into an “adjusted” profit of $1.11 a share in the fourth quarter of 2017—a 5,650% difference.

So investors should be careful not to lose sight of GAAP earnings. Standardized accounting rules are in place for consistency and comparability. Consistent revenue recognition makes reported earnings more reliable for historical comparison, and it allows investors to compare the financial results of one company to that of its industry peers and competitors. That is why the 澳洲幸运5官方开奖结果体彩网:Securities and Exchange Commission (SEC) requires publicly traded comꦅpanies to use GAAP accountin﷽g in the first place.

The SEC has begun taking enforcement actions against improper practices where companies provide greater prominence to non-GAAP figures than GAAP figures. Technology companies are amonꦬg the most frequent abusers of non-GAAP EPS because they use a significant amount of stock compensation and have large asset impairments and R☂&D costs.