The argument in favor of reporting non-GAAP earnings is that one-time hits to earnings distort the picture earnings are supposed to paint, of underlying business performance. But companies' adjustments make earnings hard to compare over time, as well as making it nearly impossible to compare between companies. And of course, making adjustments can degenerate into reporting EBBS, "earnings before bad stuff." So-called "non-core" expenses are part of doing business, as companies that exclude one or two big ones every quarter can attest.

The Wall Street Journal, looking at FactSet data, saw 2015 pro-forma earnings for the S&P 500 rise 0.4% over 2014, though not all companies had reported. Less than one percent is nothing to write home about, but it could be worse, like the 12.7% year-over-year drop in GAAP earnings. That 13 percentage-point "earnings GAAP," as cynics have affectionately named the disparity, is the largest since 2001-2002, when the dot-com bubble burst.

Mind the GAAP

If you're the sort of investor that likes to keep track of companies' quarterly earnings, be sure to read the fine print. To take a random example, United Parcel Service Inc.'s (UPS) latest earnings press release proclaimed, "2015 EPS up 14%, Reaches All-Time High of $5.43" (bold and italics in original) at the top of page 1. That sounds wonderful, but those are adjusted earnings, and the adjustments are up to the company's discretion. 

In this case, UPS excluded a change in pension expenses. Its 2015 earnings per share (EPS) according to generally accepted accounting principles (GAAP) were $5.35, 8 cents lower than the headline non-GAAP​, or pro-forma, number. To find that number, you have to make it to the fifth paragraph, without the aid of bolding or italics (or better yet, you can read the income statement).

10 Biggest Upward EPS Adjustments

Investopedia dug into FactSet's data a bit more to find exactly who was driving the wedge between GAAP and non-GAAP EPS. Of the 406 S&P 500 companies that have reported, 299 gave non-GAAP earnings higher than their GAAP ones.

Unsurprisingly, the biggest offenders include some energy names. Devon Energy Corp. (DVN), an oil and gas drilling and pipeline company based in Oklahoma City, reported a GAAP loss of $35.50 per share in 2015, a good bit more than the $19.18 its shares currently trade for. But factor in a $3.8 billion asset impairment, tax and foreign exchange adjustments – all non-GAAP – and voilà, the company made a profit of $2.52 per share. The stock price is down 69% in the past year.

Devon's earnings GAAP is the largest among S&P 500 companies reporting as of February 25. Here are the other ten:

Those are, for reference, Cimarex Energy Co. (XEC), Chesapeake Energy Corp. (CHK), Allergan PLC (AGN), Freeport-McMoRan (FCX), Anadarko Petroleum Corp. (APC), Occidental Petroleum Corp. (OXY), Murphy Oil Corp. (MUR), CR Bard Inc. (BCR) and Equinix Inc. (EQIX).

Not All So Bad

Not every company has this tendency to report EBBS. Forty companies have so far reported just one set of earnings, the GAAP one. These include Apple Inc. (AAPL), Alphabet Inc. (GOOG, GOOGL), Exxon Mobil Corp. (XOM), Amazon.com Inc. (AMZN), Wells Fargo & Co. (WFC) and Philip Morris International Inc. (PM).

And 67 companies reported non-GAAP earnings that were lower than the corresponding GAAP figure. United Continental Holdings Inc. (UAL) reported GAAP EPS of $19.47, but adjusted it down to $11.88 by excluding "special items."

The Bottom Line

Companies must report earnings according to generally accepted accounting principles (GAAP), so make sure to look out for those figures in earnings releases. Often, they like to report their own figures, which they can tweak however they like. Often the adjustments make sense and help investors to get a better sense of a company's actual underlying performance. But sometimes the adjustments themselves present a trend and should be taken as a red flag for investors. Like when a $14.5 billion dollar loss becomes a $1.0 billion profit.