Headline earnings represent a way of reporting corporate earnings focused exclusively on operational, trading, and capital investment activities realized during the previous period. This metric excludes profits or losses stemming from the sale or discontinuation of businesses, fixed assets, or any permanent devaluation or write-off of their values.
Key Takeaways
- Operational Focus: Headline earnings report a company’s income derived from operations, trading, and investments only.
- Exclusion Mechanism: They exclude singular or exceptional items such as write-offs or discontinued operations.
- Analytical Clarity: Analysts utilize headline earnings to gauge a company’s capacity during standard business operations.
Unveiling Headline Earnings
Headline earnings offer a disciplined measurement tool to highlight core operational profitability. By omitting asset sales, discontinued operations, restructuring charges, and write-downs, this figure reveals the profitability of a company’s essential business activities. These exclusions provide a clearer view of how a company runs on an ongoing basis, enabling a more accurate understanding of core operations without the distortive effects of one-time charges or special items. Nevertheless, these items are noteworthy for analysts, particularly if they reoccur or massively impact future strategies.
Circumstantial Reporting
Some firms also report headline earnings per share (EPS) alongside mandatory EPS figures, factoring in other items. As non-GAAP earnings, headline earnings must be reconciled with net income in shareholder communications to comply with SEC regulations.
Initiated in 1993 by the former Institute of Investment Management and Research (IIMR) in the UK, this method aimed to offer a true representation of a firm’s performance during standard operations by filtering out one-time charges or write-offs.
Highlighting Discrepancies with Headline Earnings
While evaluating headline earnings, consider the quality of earnings and the rationale behind the exclusions. Research indicates that headline figures often exclude losses more than gains, questioning their validity at times. Modern practice sees GAAP earnings lagging behind non-GAAP earnings as companies frequently make
Related Terms: operational earnings, investment activities, EPS, non-GAAP earnings, corporate finance.
References
- U.S. Securities and Exchange Commission. “Non-GAAP Financial Measures”.
- Institute of Investment Management and Research. “The Definition of IIMR Headline Earnings: Issue 1 of Statement of investment practice”. 1993.
- Merck. “Merck Announces Third-Quarter 2017 Financial Results”.
