Glossary
Non-GAAP earnings
Profit figures a company reports that exclude some items GAAP requires, such as stock compensation; useful but easy to flatter.
Non-GAAP earnings are profit measures a company calculates by its own rules, adding back or removing items that generally accepted accounting principles (GAAP) require in reported results. Common versions are adjusted earnings per share, adjusted EBITDA and free cash flow. Companies argue the adjustments show the underlying business more clearly; critics note that the adjustments almost always make results look better. Most large US companies headline a non-GAAP figure in their earnings releases, and analyst consensus estimates are often built on it.
How an adjusted number is built
A company starts from GAAP net income and adjusts for items it considers unusual or non-cash.
The rules that apply
In the US, the SEC's Regulation G and Item 10(e) of Regulation S-K govern non-GAAP disclosure. A company that presents a non-GAAP measure must show the most directly comparable GAAP measure, give a reconciliation between the two, and, in SEC filings, present the GAAP figure with equal or greater prominence. SEC staff have also objected to measures that are misleading, such as excluding normal, recurring cash operating expenses.
What to watch for
Read the reconciliation, not just the headline. Stock-based compensation is a real cost to shareholders through dilution, even though no cash leaves the company. "Restructuring" charges that recur year after year are part of the business. Compare how far apart GAAP and non-GAAP results are over several years, and whether the list of adjustments keeps growing.