What are Headline Earnings? Explained

Headline earnings are a restatement of a company’s profit that removes the effect of one-time charges, write-downs, cost-cutting, and other extraordinary items like tax liabilities. Another way of looking at headline earnings is that it is the part of a company’s earnings that pertains to its core business activities.

Headline Earnings

What are Headline Earnings?

Headline Earnings is a method of reporting a company’s Income on operational, trading, and other investment activities achieved in the previous fiscal period. Remember that the headline earning figure will not include the profit or losses that comes with sales or termination of discontinued operations, fixed assets, or related businesses.

It is a measurement tool that isolates core operational profitability. It shows a company’s core business profitability by excluding asset sales, termination of discontinued operations, etc. By doing this, one can view a good picture of how a company operates on a daily basis. Some companies conduct the reporting of headline earnings based on earning per share basis (EPS) in addition to the EPS figures that are taken into account.

Headline earnings are non-GAAP and should be reconciled with net income when displayed on shareholder reports.

Why Do Headline Earnings Matter?

The headline earnings method accounts for revenue generated through business-as-usual activities, that is, ongoing operations or investment activities that increase a company’s bottom line. This method helps financial analysts obtain a clearer picture of a company’s ability to generate revenues from its core business activities rather than from non-recurring events such as cost-cutting, sales of assets, or accounting write-downs.

Presentation of Headline Earnings

The presentation of headline earnings is not allowed under Generally Accepted Accounting Principles or International Financial Reporting Standards, and so is not allowed within a company’s financial statements. Thus, it is more of a public relations or financial analysis concept than an accounting concept. Businesses like to report headline earnings to please their investors, since this approach is more likely to exclude one-time losses from reported results than one-time gains.

If a publicly held company were to report headline earnings, SEC regulations require it to also present a reconciliation back to the net income of the business, explaining any differences between the reported measurements.

Presentation of Headline Earnings

Example of Headline Earnings

ABC International reports $100,000 of earnings in its most recent quarter, which includes a $10,000 gain on the sale of fixed assets and a $30,000 impairment charge on other fixed assets. The headline earnings for ABC would be $120,000, which factors out the two transactions just noted

What is not included in Headline Earnings

The headline earnings concept does not include the following types of earnings:

  • Profits or losses caused by the sale of assets
  • Profits or losses caused by the termination of discontinued operations
  • Profits or losses caused by write-downs in the value of assets
  • Profits or losses caused by reductions in the number of employees

The concept can also be applied to earnings per share to arrive at headline earnings per share

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.

KEY TAKEAWAYS

  • 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.

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