Headline Earnings

Headline earnings measure a company’s profit from its core operational, trading, and investment activities by excluding one-time or exceptional items. The aim is to show how the business performs in its “business as usual” capacity without distortions from disposals, discontinued operations, write-downs, or other non-recurring items.

Key takeaways

• Headline earnings focus on ongoing operational profitability and exclude exceptional or one-off items.
• They are treated as non-GAAP measures and must be reconciled with net income when reported.
• Useful for assessing recurring performance, but exclusions can be misused or mask recurring adjustments.

What headline earnings include and exclude

Included:
* Income from normal operations, trading activities, and capital investments.

Excluded (commonly):
* Gains or losses from the sale or disposal of businesses or fixed assets.
Results from discontinued operations.
Permanent devaluations, impairments, or write-offs.
* Restructuring charges and other one-time items deemed non-recurring.

Headline earnings per share (EPS) and regulatory treatment

• Companies sometimes report headline EPS alongside GAAP/IFRS EPS.
• Because headline measures omit certain items, they are non-GAAP and—where applicable—must be reconciled with GAAP/IFRS net income in shareholder reports and filings, in line with securities regulations.

Origin

The headline earnings concept was formalized in 1993 by the Institute of Investment Management and Research (IIMR) in the U.K. to provide a clearer view of a firm’s recurring profit performance.

Criticisms and limitations

• Selective exclusions: Firms can exclude items selectively, making headline earnings more favorable than GAAP figures. Research suggests headline measures may be more likely to omit losses than gains.
• Non-recurring items can become recurring: When “one-time” adjustments repeat, headline earnings overstate sustainable profitability.
• Divergence from GAAP/IFRS: Large differences between headline and reported net income can be misleading. For example, a company once adjusted a GAAP loss of $0.02 per share to an “adjusted” headline EPS of $1.11 for the quarter—an extreme disparity that highlights potential issues.

How investors should use headline earnings

• Treat headline earnings as a supplemental indicator of recurring performance, not a replacement for GAAP/IFRS earnings.
• Examine the reconciliations and the nature of excluded items. Determine whether exclusions are truly non-recurring or likely to repeat.
• Compare headline metrics across peers cautiously—definitions and exclusions can vary by company.
• Use headline earnings alongside cash flow analysis and other quality-of-earnings assessments.

Conclusion

Headline earnings can clarify a company’s core operating performance by removing exceptional items, but they require careful scrutiny. Investors should review reconciliations and the substance of exclusions to avoid being misled by adjustments that inflate apparent profitability.