Glossary term
Adjusted Earnings
Adjusted earnings are company-reported earnings that exclude selected items to present an alternative view of performance.
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What Are Adjusted Earnings?
Adjusted earnings are earnings that a company modifies by excluding or changing the treatment of selected items. Companies often present adjusted earnings to show what management believes is a clearer view of operating performance than GAAP net income alone.
Adjusted earnings are usually a non-GAAP measure. That means the company must explain how it calculates the measure and reconcile it to the closest GAAP figure when required. The adjustment can be useful, but it can also make results look smoother or stronger than they are.
Key Takeaways
- Adjusted earnings remove or modify selected items from reported earnings.
- Common adjustments include restructuring costs, acquisition costs, impairment charges, stock-based compensation, or one-time gains and losses.
- Adjusted earnings can clarify recurring performance, but they can also obscure real costs.
- Investors should compare adjusted earnings with GAAP results and cash flow.
How Adjusted Earnings Work
A company begins with a GAAP earnings measure such as net income or earnings per share. It then adds back or removes items that management believes make the period less comparable. For example, a company might exclude a large restructuring charge after closing facilities, or exclude acquisition-related costs after buying another business.
The usefulness of adjusted earnings depends on the quality of the adjustments. Removing a rare legal settlement may help isolate recurring operations. Removing normal recurring expenses that are part of running the business can make the measure less reliable.
Common Adjustments
Adjustment | Possible reason | Investor question |
|---|---|---|
Restructuring charges | Management views them as unusual | Are they truly rare or recurring? |
Impairments | Non-cash write-downs can distort a period | What caused the asset to lose value? |
Stock-based compensation | Non-cash expense | Does it still dilute shareholders? |
Acquisition costs | Deal-related expenses | Are acquisitions part of the normal strategy? |
Tax or legal items | May be unusual or period-specific | Could similar items appear again? |
How to Read Adjusted Earnings
Adjusted earnings should not replace GAAP earnings. The two figures answer different questions. GAAP earnings follow standardized accounting rules. Adjusted earnings show management's alternative view of performance.
A useful review compares the adjusted number, the GAAP number, the reconciliation, and the company's history of adjustments. If adjusted earnings consistently exceed GAAP earnings by a wide margin, investors should understand why.
The Bottom Line
Adjusted earnings can help explain underlying performance, but only when the adjustments are transparent and reasonable. The best reading pairs adjusted earnings with GAAP earnings, cash flow, margins, and the specific items management excluded.