What Are S&P Core Earnings?

S&P Core Earnings are used to calculate a company's after-tax profits that come from its core business operations. Unlike the number reported for net income, they disregard one-time revenues or costs that are not part of the company’s main business activities.

As the name suggests, S&P Core Earnings were created by Standard & Poor’s (S&P) in 2002. Their objective is to make company earnings easier to compare from period to period by removing one-time items that can distort the picture for better or worse.

Key Takeaways

  • S&P Core Earnings are used to calculate a company's after-tax profits that are attributable to its core business operations.
  • They can be seen as a more conservative version of the company's reported net income.
  • That is, the S&P Core Earnings number disregards one-time revenues and expenses.
  • Crucially, they include the cost of stock options as an expense. This can have a significant impact on the profitability of companies that rely on stock options for employee compensation.

Understanding S&P Core Earnings

The calculation of S&P Core Earnings begins with the company's reported net income as defined in accordance with Generally Accepted Accounting Principles (GAAP).

The net income is then adjusted to include expenses such as pension costs, stock options granted to employees, research and development expenses, and restructuring costs.

The inclusion of stock options as an expense is significant because it prevents companies from understating the cost of their employees. For some companies, stock options are a significant component of employee compensation. In those instances, S&P Core Earnings are a more accurate representation of real costs because stock options are an expense that reduces a company's profitability.

One-Time Gains and Losses Are Ignored

S&P Core Earnings also ignore sources of revenue that are not part of the company's principal business activities. Examples include one-time gains from the sale of assets, gains in pension assets, unrealized gains from hedging activities, and proceeds from litigation or insurance settlements.

S&P Core Earnings are often viewed as a more conservative measure of profitability than reported net income. For example, they ignore gains or pension assets while including their costs.

Impact of S&P Core Earnings

The S&P Core Earnings measure is meant to capture earnings due to ongoing core business operations. Because it excludes extraneous or one-time events and disregards the effect of capital market performance on income, it is typically viewed as an indicator of a company’s real earnings performance.

Since their introduction, S&P Core Earnings have achieved some acceptance as another method of evaluating a company's performance. Management Accounting Quarterly, a professional journal, suggested that S&P Core Earnings, in combination with GAAP earnings, could give stock analysts and investors a clear picture of corporate performance.

This point can be made more bluntly. Dimitris N. Chorafas, the author of Creative Accounting, EBITDA, and Core Earnings, notes that "Many companies are prone to use financial levers, such as gains from their pension funds, to boost their profits." The S&P Core Earnings method is designed to make such maneuvers unsuccessful.