What are headline earnings?
Headline earnings show business results solely based on operating, trade, and capital investment activity from the prior period. Headline earnings exclude profits or losses from terminated activities, fixed assets, connected enterprises, or irreversible devaluation or write-offs.
Knowing Headline Earnings
Quantify operational profitability precisely. Headline profits reflect a company’s core business performance by removing asset sales, discontinued activities, restructuring expenses, and write-downs. Due to these exclusions, headline profits offer a more unambiguous indication of a company’s continuous operations than one-time costs or unique events that are unlikely to occur again. However, analysts care about these factors, especially if they repeat or significantly affect prospects.
Companies disclose headlines and necessary EPS statistics, which may include various elements. To comply with SEC standards, shareholder reports must reconcile non-GAAP headline profits with net income, excluding certain items.
The UK’s old Institute of Investment Management and Research (IIMR) introduced this headline profits per share measurement in 1993.IIMR created this approach to examine a company’s P&L statement and better portray activities during “business as usual,” avoiding one-time charges or write-offs.
Criticism
To avoid misinformation, investors should evaluate a company’s earnings quality and exclusions on a case-by-case basis. Headlines tend to exclude losses more than wins, according to a study.GAAP earnings lag behind non-GAAP earnings due to the prevalence of “one-time” adjustments or charges, which become problematic quarterly.
In the third quarter of 2017, Merck (MRK) transformed a GAAP loss of $0.02 per share into an “adjusted” headline EPS of $1.11, a 5,650% difference.
Key Takeaways
- Headline earnings solely include operations, trade, and investments.
- Therefore, headline profits exclude write-offs and other unique factors.
- Headline earnings indicate a company’s business-as-usual performance to analysts.
