Loading the player...

What are 'Non-GAAP Earnings'

Non-GAAP earnings are an alternative method used to measure the earnings of a company, and many companies report non-GAAP earnings in addition to their earnings based on Generally Accepted Accounting Principles (GAAP). While these pro forma figures, which exclude "one-time" items, can sometimes provide a more accurate measure of a company’s underlying financial performance, investors need to be wary of misleading reporting that exclude items that have a negative impact on GAAP earnings, quarter after quarter.


The justification for reporting non-GAAP earnings is that large one-off costs, such as asset write-downs or organizational restructuring, should not be considered normal operational costs, because they distort the true financial performance of a company. So, some companies provide an adjusted earnings number that excludes these nonrecurring items. Commonly used non-GAAP financial measures include earnings before interest and taxes (EBIT); earnings before interest, taxes, depreciation, and amortization (EBITDA); adjusted revenues; free cash flows; core earnings; and funds from operations.

When used appropriately, these non-GAAP financial measures can help companies provide a more meaningful picture of their performance and value. Showing how the core portion of the business is doing can be useful. However, there is no industry-standard definition of non-GAAP EPS, and many of these adjusted-EPS figures are merely designed to appear in headlines — and deceive trading algorithms as well as investors.

Non-GAAP Figures Have Become a Bad Habit

Investors need to consider the validity of non-GAAP exclusions on a case-by-case basis to avoid being misled. Studies have shown that adjusted figures are more likely to exclude losses than gains. GAAP earnings now significantly trail non-GAAP earnings, as firms become addicted to “one-time” adjustments which become a nonsense when they happen every quarter. Merck, for example, turned a loss of -$0.02 per share under GAAP into an “adjusted” profit of $1.11 a share in the fourth quarter of 2017 — a 5,650% difference!

Chart showing the number of companies reporting non gaap eps.

Chart showing the DJIA median difference of non gaap vs gaap eps.

So, investors should be minded to not lose sight of GAAP figures. Standardized accounting rules and consistent revenue recognition make reported earnings more reliable, and allow investors to compare the financial results of different companies. That is why the Securities and Exchange Commission (SEC) requires publicly listed companies to use GAAP accounting in the first place.

SEC Crackdown on Non-GAAP Disclosures

U.S. companies are under increasing pressure from the SEC to disclose GAAP earnings upfront in their earnings reports, before pointing at non-GAAP earnings. In 2017, it began taking enforcement actions against improper practices that provide greater prominence to non-GAAP measure than GAAP measures. Technology companies are among the most frequent abusers of non-GAAP EPS, because they use a lot of stock compensation and have a lot of asset impairments and R&D costs.

  1. Accounting Noise

    Accounting noise is the distortion in a company's financial statements ...
  2. Core Earnings

    Core earnings are derived from a company's main or principal ...
  3. Pro-Forma Earnings

    Pro-forma earnings are earnings that exclude certain costs that ...
  4. Headline Earnings

    Headline earnings are a basis for measuring earnings per share ...
  5. Earnings

    Earnings typically refer to after-tax net income or a company's ...
  6. S&P Core Earnings

    S&P Core Earnings measures earnings generated by normal, ongoing ...
Related Articles
  1. Investing

    Why Non-GAAP Earnings May Be Risky for Investors

    Companies' rising use of non-GAAP accounting is making many earnings reports look far better than they are, a key warning sign for investors.
  2. Investing

    Why GAAP and Non-GAAP Are More Divergent Since 2009

    Examine the divergence of GAAP and adjusted earnings in the years leading up to 2015 to identify the factors causing the gap to widen.
  3. Investing

    Why Financial Statements Are Harder to Read Than Ever Before

    Understand four major reasons that financial statements published in 2016 are more complicated and difficult to read than they were in the past.
  4. Investing

    Disney Stock: An Earnings Case Study (DIS)

    Explore an earnings case study of The Walt Disney Company, and learn about its earnings and revenue in 2014 and 2015 and what analysts expect for Disney in 2016 and 2017.
  5. Investing

    Broadcom Shares Surge After Hours On Solid Quarter

    Broadcom beats analyst expectations for Q4 top and bottom line.
  6. Insights

    Is This the End of Quarterly Earnings Reports?

    The SEC has issued a concept release calling for public comment on the requirement to submit quarterly earnings. Depending on the feedback, the practice may end.
  7. Investing

    Facebook Stock: An Earnings Case Study (FB)

    Explore an earnings case study on Facebook, and learn about its earnings, advertising revenue and total revenue growth rates during 2014 and 2015.
  8. Insights

    Alphabet Stock: What to Expect from Earnings (GOOG, GOOGL)

    Alphabet, the parent company of Google, is set to report first-quarter results after the close Thursday. Analysts are expecting a 21.2% rise in non-GAAP​ earnings per share, to $7.96 from $6.57 ...
  9. Investing

    Intuit's Shiny Quarter: What It Says About Tech

    Tech Sweet SpotL The software company's earnings and revenue topped estimates
  10. Investing

    Medtronic 3Q Earnings Beat Street

    Medical device maker Medtronic reported better-than-expected 3Q earnings of $1.12 a share.
  1. What are the key differences between pro forma statements and GAAP statements?

    Learn the key differences between pro forma and GAAP statements. Review examples and cautionary notes about reliance on pro ... Read Answer >>
  2. Who enforces GAAP?

    Take a deeper look at the private enforcement mechanisms behind the generally accepted accounting principles for American ... Read Answer >>
  3. How does inventory accounting differ between GAAP and IFRS?

    Learn about inventory costing differences between generally accepted accounting principles (GAAP) and International Financial ... Read Answer >>
  4. How do investors and lenders benefit from financial accounting?

    Read about the benefits of financial accounting, including access to information and transparency between companies and their ... Read Answer >>
  5. Why should an investor understand accounting?

    Learn why an investor should understand business accounting to perform investment and credit analysis. Find out about asset ... Read Answer >>
  6. How do I calculate an EBITDA margin using Excel?

    Learn about the EBITDA (earnings before interest, tax, depreciation and amortization) profit margin and how to use Microsoft ... Read Answer >>
Trading Center