Headlineearnings

Understanding Headline Earnings: Definition, Analysis, and Criticisms

Key Takeaways

Headline earnings refer to earnings derived from a company’s core operations, excluding gains or losses from one-time events.
By focusing on operational profitability, headline earnings offer a clear view of regular business performance.
Some firms report headline earnings per share, which differ from traditional EPS by excluding non-recurring items.
Analysts use headline earnings to evaluate a company’s consistent revenue generation from core activities.
For investment decisions involving company analysis, consider resources like Investopedia's "best" online brokers.

What Are Headline Earnings?

Headline earnings represent a way of calculating a company's earnings per share (EPS), focusing solely on its operational, trading, and capital investment activities, and are used to provide a clear picture of a company's ongoing business performance. This metric excludes profits or losses from activities such as the sale of fixed assets or discontinued operations, offering investors and analysts insight into the core profitability of a company. Developed by the Institute of Investment Management and Research in 1993, headline earnings help investors understand business performance without the noise of one-time charges or exceptional items.

How Headline Earnings Reflect Core Business Performance

Headline earnings provide a stringent measurement tool to isolate core operational profitability. By excluding asset sales, discontinued operations, restructuring charges and write-downs, the headline earnings number shows the profitability of a company's core business. Because headline earnings make these exclusions, it provides a better picture of a how company operates on an ongoing basis, where one-time charges or special items that are unlikely to occur again can give an unfair impression of true operations. At the same time, these items certainly do matter for analysts, especially if they end up recurring or greatly impacting future prospects.

Some companies report headline earnings per share (EPS) in addition to required EPS figures that take into account other items. Because it does not account for these items, headline earnings are considered to be non-GAAP and must be reconciled with net income if presented in shareholder reports, in accordance with SEC regulations.1

This basis for measuring headline earnings per share was implemented in 1993 by the former Institute of Investment Management and Research (IIMR) in the United Kingdom.2 IIMR developed this method as a way to better analyze a company's P&L statement with a picture that would better represent a firm's operations during "business as usual," which could be clouded by a one-time charge or write-off.

Challenges and Criticisms 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.

For example, Merck (MRK) turned a loss of $0.02 per share under GAAP standards into an "adjusted" headline EPS of $1.11 a share in the third quarter of 2017—a 5,650% difference.3

U.S. Securities and Exchange Commission. "Non-GAAP Financial Measures." Accessed Jan. 12, 2021.

Institute of Investment Management and Research. "The Definition of IIMR Headline Earnings: Issue 1 of Statement of investment practice." 1993.

Merck. "Merck Announces Third-Quarter 2017 Financial Results." Accessed Jan. 12, 2020.

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