Definition
Non-GAAP earnings are a measure of a company’s financial performance that excludes certain items which are not usually part of its regular operations. This includes one-time expenses or benefits, such as restructuring costs, interest, tax, depreciation, and amortization. This measure, though not standardized, gives investors a clearer view of a company’s ongoing operational profitability.
Key Takeaways
- Non-GAAP Earnings refers to a measure of earnings reported by a company that are not as per the Generally Accepted Accounting Principles (GAAP). Companies often use non-GAAP earnings to provide a clearer picture of their financial performance, excluding one-time charges and other items the company believes are not representative of its ongoing operations.
- While Non-GAAP earnings can provide valuable insights about a company’s core business performance, they can also be potentially misleading. Companies have a certain degree of leeway in deciding what to include and exclude, which may lead to a more favorable presentation of their financial health. Hence, investors should consider GAAP earnings in conjunction with non-GAAP measures.
- Securities and Exchange Commission (SEC) regulations require that when companies report non-GAAP earnings, they must also disclose how these figures differ from standard GAAP earnings, ensuring some degree of transparency. This allows investors to make meaningful comparisons between the financial performances of different companies.
Importance
Non-GAAP earnings is an important financial term as it offers investors and financial analysts an alternate method to gauge a company’s performance and profitability.
These earnings exclude one-time costs, items deemed non-recurring or irregular, and other adjustments that may skew the understanding of a firm’s actual operating performance.
By eliminating these unusual or non-operational items, non-GAAP earnings can provide a clearer picture of a company’s ongoing profitability and financial health, enabling stakeholders to make more informed investment decisions.
However, it’s important to use them complementary to GAAP earnings, as companies have more flexibility with non-GAAP measures which could lead to manipulations.
Explanation
Non-GAAP Earnings are an alternative approach utilized by companies to gauge their financial performance, which deviates from the Generally Accepted Accounting Principles (GAAP). Typically, these earnings are adopted to reflect a more precise depiction of a company’s operational profitability. The reason for this lies in the understanding that GAAP earnings, as robust and comprehensive as they are, can sometimes be influenced by non-recurring, unusual, and non-cash items, such as restructuring costs, asset write-downs, or legal expenses, thereby deviating from the true operational earnings.
Non-GAAP earnings strip out these items to offer a clearer picture of the core business operations. The purpose and use of Non-GAAP earnings are multi-fold.
For one, it serves an invaluable tool for management and investors alike to gauge a company’s financial health, concentrating on aspects that are under the firm’s direct control. These earnings offer key insights into areas such as controlling costs, managing resources, and operational efficiency – parameters closely tied to operational profitability.
Secondly, they are used for offering forward-looking projections, helping stakeholders understand where the company is heading. However, while these make for a valuable addition to the overall financial assessment, reliance solely on Non-GAAP earnings is discouraged, given that these are not standardized and susceptible to manipulation.
Examples of Non-GAAP Earnings
**Tesla**: In Q4 of 2020, Tesla reported a Non-GAAP net income (excludes stock-based compensation) of $903 million while its GAAP net income (which includes all items) was $270 million. This shows that the company used Non-GAAP metrics to exclude certain expenses and present a more favorable financial status.**Amazon**: In 2019, Amazon reported its GAAP operating income as $
54 billion. However, they provided an additional metric or a Non-GAAP measure, “Cash Flow from Operations” which came out to be $33 billion. Amazon provides Non-GAAP measures to give the investors an alternative view of the company’s cash generation capability.
**Alibaba**: For its fiscal year ending March 2020, Alibaba reported a GAAP net income of26 billion yuan. However, on a Non-GAAP basis (which excludes certain one-time items), the company’s income was much higher, at
68 billion yuan. Alibaba uses Non-GAAP earnings to give investors a clearer picture of the company’s recurring profits by eliminating the impact of certain non-recurring items.
FAQs about Non-GAAP Earnings
What are Non-GAAP Earnings?
Non-GAAP earnings are a type of profit measure that departs from the standards set by the Generally Accepted Accounting Principles (GAAP). Non-GAAP earnings are adjustments made by companies to provide a more accurate picture of their financial performance and to eliminate the potential anomalies present in GAAP accounting.
Why do companies use Non-GAAP Earnings?
Companies use Non-GAAP earnings to highlight special items, unusual expenses or non-cash items that the company believes may not be indicative of its operating performance. This can provide investors and analysts with a better understanding of the company’s core business and future earnings potential.
What is the difference between GAAP and Non-GAAP Earnings?
GAAP earnings must follow specific regulations set by the Financial Accounting Standards Board (FASB) and include all of the company’s financials. On the other hand, Non-GAAP earnings can exclude certain items the company believes don’t reflect its underlying business performance. Although Non-GAAP earnings can offer more clarity in some instances, it’s important to compare these figures with GAAP numbers for a comprehensive understanding.
Are Non-GAAP Earnings reliable?
While Non-GAAP earnings can provide additional insight into a company’s operations, they should not be relied upon solely. It is always important to also analyze the GAAP earnings because Non-GAAP measures can be subject to manipulation. Furthermore, Non-GAAP earnings aren’t standardized, meaning they can vary greatly from company to company.
How can I find a company’s Non-GAAP Earnings?
Companies typically disclose their Non-GAAP earnings in their quarterly earnings reports, annual reports, or SEC filings. It’s usually distinguished from GAAP earnings and accompanied by a detailed explanation of the items that have been removed or added.
Related Entrepreneurship Terms
- Adjusted Earnings
- Earnings Exclusions
- Pro Forma Earnings
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
- Non-Operating Income
Sources for More Information
- Investopedia: A comprehensive website for financial and investment terms and explanations.
- Nasdaq: Known for its stock exchange, it also provides useful information about financial terms and practices.
- The U.S. Securities and Exchange Commission: The primary regulator of U.S. financial markets, with a wealth of information on finance and accounting standards.
- CFA Institute: An international organization of investment professionals that offers a vast range of financial knowledge, tools, and resources.
