What Is S&P Core Earnings?

S&P Core Earnings is a method for calculating the after-tax profit attributable to a company’s core business operations. It differs from net income because it excludes revenues that are not part of a company’s main business activities.

As its name suggests, S&P Core Earnings was created by Standard & Poor’s (S&P) in 2002, following a lengthy research process. The goal of this process was to help market participants by making companies’ earnings calculations more consistent and easier to compare.

Key Takeaways

  • S&P Core Earnings is a method for calculating the after-tax profit attributable to a company’s core business operations.
  • It can be seen as a more conservative version of reported net income.
  • One significant difference from net income is that it includes 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 their employee compensation packages.
  • S&P Core Earnings can help provide a consistent basis for comparing companies’ profitability.

How S&P Core Earnings Works

The calculation of S&P Core Earnings begins with reported net income as defined in accordance with Generally Accepted Accounting Principles (GAAP). 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 their employees’ compensation. In those instances, S&P Core Earnings can give a more accurate representation of total costs because it will reflect those stock options as an expense, thereby reducing profitability.

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

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

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 pure earnings performance.