What Are Headline Earnings?
Headline earnings refer to a method of reporting corporate earnings based entirely on operational, trading, and capital investment activities achieved during the previous period. Excluded from the headline earnings figure are profits or losses associated with the sale or termination of discontinued operations, fixed assets or related businesses, or from any permanent devaluation or write-off of their values.
- Headline earnings report a company's income from operations, trading, and investments only.
- Headline earnings therefore exclude certain one-time or exceptional items such as write-offs.
- Analysts look to headline earnings as a basis for how a company is operating at its business as usual capacity.
Understanding Headline Earnings
Headline earnings provide a stringent measurement tool to isolate core operational profitability. By excluding asset sales, termination of discontinued operations, restructuring charges and write-downs, the headline earnings number shows the profitability of a company's core business. Because headline earnings make these exclusions, they provide a better picture of a how company operates on an ongoing basis, where one-time charges or special items that are unlikely to occur again can give an unfair impression of true operations. At the same time, these items certainly do matter for analysts, especially if they end up recurring or greatly impacting future prospects.
Some companies report headline earnings per share (EPS) in addition to required EPS figures that take into account other times. Because it does not account for these items, headline earnings are considered to be non-GAAP and must be reconciled with net income if presented in shareholder reports, in accordance with SEC regulations.
This basis for measuring headline earnings per share was first implemented by the former U.K. Institute of Investment Management and Research (IIMR). IIMR developed this method as a way to better analyze a company's P&L statement with a picture that would better represent a firm's operations during 'business as usual', which could be clouded by a one-time charge or write-off.
Criticism of Headline Earnings
A company's quality of earnings is important, so investors need to consider the validity of headline earnings and the exclusions that it makes on a case-by-case basis in order to avoid being misled or misinformed. For instance, research has shown that headline figures are more likely to exclude losses than gains. GAAP (generally accepted accounting principles) earnings now significantly trail non-GAAP earnings, as companies become accustomed to including “one-time” adjustments or charges, which become problematic when they start to occur every quarter.
Merck, for example, recently turned a loss of -$0.02 per share under GAAP standards into an “adjusted” headline EPS of +$1.11 a share in the fourth quarter of 2017 — a 5,650% difference!