Adjusted earnings
The profit figure the company would prefer you used. Sometimes clearer than the official one, sometimes a press release with a decimal point.
Open almost any earnings release and you will find two profit figures: the audited one prepared under accounting standards, and a larger one labelled adjusted, underlying, or core. The gap between them is worth understanding, because it is where the argument lives.
Why the practice exists at all
Statutory profit includes everything, and some of what it includes genuinely obscures how the business is trading. A factory fire, a legal settlement, the cost of closing a division — these are real and they are not informative about next year.
In the United States, non-GAAP figures may be presented provided the comparable GAAP measure is given equal prominence and a full reconciliation is supplied. So the company must show you its work. The reconciliation table is usually near the back of the release and is the only part of it worth reading closely.
Adjustments that are usually reasonable
- Costs of an acquisition itself — advisory fees, integration — for a company that does not acquire routinely.
- A genuinely one-off legal settlement.
- Gains or losses on selling a business, which say nothing about operations.
- Non-cash impairments, provided the reader understands why the write-down happened.
Adjustments that deserve resistance
- Stock-based compensation. The largest and most common exclusion, and the least defensible: the staff were paid.
- Restructuring, every single year. A cost that recurs annually is an operating cost with an apologetic name.
- Amortisation of acquired intangibles at a company that acquires continuously. Defensible once, not as a policy.
- Currency effects, for a business that has chosen to operate in those currencies.
Take five years of adjustments and lay them side by side. If the same category appears every year, it is not exceptional — it is a normal cost of running that company, and excluding it overstates sustainable earnings by roughly that amount, every year. This test takes fifteen minutes and is remarkably effective.
The asymmetry
Adjustments overwhelmingly move profit upward. Companies rarely present an adjusted figure that excludes a lucky gain, even though consistency would require it. That skew is the clearest evidence that these measures are, in aggregate, presentational.
The practical rule
Use statutory profit as your baseline and treat every adjustment as a claim the company has to justify. Where the justification holds, accept it. Where the same adjustment appeared last year and the year before, add it back. And check the result against cash: over several years, cumulative free cash flow should bear some resemblance to cumulative reported profit. Where it does not, the accounting is telling you something the narrative is not. See free cash flow.