What are 'Core Earnings'

Core earnings are the revenues derived from a company's main or principal business, less all expenses for the main activities as well as nonrecurring income or expense items that lie outside the normal business. "Core earnings" as an earnings measure is not recognized as a generally accepted accounting principle (GAAP) concept; instead, it is used by management and investors to ascertain the profitability of the underlying business and help identify opportunities to minimize or shed non-core activities of the business.

BREAKING DOWN 'Core Earnings'

Accounting statements contain earnings associated with normal business activities, as well as those associated with nonrecurring or side items. Core earnings eliminate noise in the profit and loss (P&L) statement by removing line items such as extraordinary gains or losses during a period, restructuring charges, write-downs for impairments, income or losses from equity-accounted investments and charges for discontinued operations. By taking out these nonrecurring items, a cleaner look at the underlying business is produced for all interested parties. For management, keeping track of core earnings can illuminate areas that add some volatility to reported numbers.

The company could take action to dampen the volatility by, for example, getting rid of an asset that has caused an impairment loss or a restructuring charge. For investors, seeing core earnings enhances their capacity for valuation analysis and relative value analysis of core earnings of companies in the same sector. Core earnings will also help investors make adjustments to price multiples such as price-to-earnings ratio (P/E), price-to-forward earnings (Forward P/E), price-to-cash flow ratio (P/CF), and others, but instead of "P/E," for instance, "Core P/E" will become the metric of focus.

Example of Core Earnings

One of the first numbers an investor pays attention to is earnings per share (EPS). At first glance, The Procter & Gamble Company (P&G) may have alarmed investors that it earned only $0.93 per share in the second quarter of its 2018 fiscal year. However, core EPS was actually $1.19 as it "excludes non-core restructuring charges and U.S. Tax Act transitional impacts," according to the company statement. The latter involved a revaluation of a net deferred liability position associated with a repatriation tax charge on earnings abroad. This was a one-off item that will not recur. P&G in the same press release continues the differentiation between core earnings and GAAP earnings by providing forward guidance of EPS for both. This type of guidance that separates the two types of EPS numbers helps to provide a clearer picture.

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