Headline earnings definition

What are Headline Earnings?

Headline earnings is a subset of the total profits reported by a business. These earnings are useful for a financial analyst who wants to determine the earnings level of the core day-to-day operations of a business, without other ancillary transactions cluttering up the earnings information. It is also useful for comparing the results of the core operations of similar businesses within the same industry. When a business reports headline earnings, it is only including profits or losses generated by its operations and investment activities. The headline earnings concept does not include the following types of earnings:

  • Profits or losses caused by the sale of assets

  • Profits or losses caused by the termination of discontinued operations

  • Profits or losses caused by write-downs in the value of assets

  • Profits or losses caused by reductions in the number of employees

The concept can also be applied to earnings per share to arrive at headline earnings per share.

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Presentation of Headline Earnings

The presentation of headline earnings is not allowed under Generally Accepted Accounting Principles or International Financial Reporting Standards, and so is not allowed within a company's financial statements. Thus, it is more of a public relations or financial analysis concept than an accounting concept. Businesses like to report headline earnings to please their investors, since this approach is more likely to exclude one-time losses from reported results than one-time gains.

If a publicly held company were to report headline earnings, SEC regulations require it to also present a reconciliation back to the net income of the business, explaining any differences between the reported measurements.

Limitations of Headline Earnings

There are several limitations to the reporting of headline earnings. First, the decision to exclude certain items from reported earnings is purely subjective on the part of management. This can mean that a business might alter what is included in or excluded from its headline earnings from one period to the next, which is inconsistent and confuses the users of this information. This also makes it difficult to compare headline earnings information across an industry. A second limitation is that there are strong arguments favoring the inclusion of all expense items in the headline earnings figure, because they are a normal part of the ongoing results of a business - they just fall outside of its core operations.

Example of Headline Earnings

Eskimo Construction reports $100,000 of earnings in its most recent quarter, which includes a $10,000 gain on the sale of fixed assets and a $30,000 impairment charge on other fixed assets. The headline earnings for Eskimo would be $120,000, which factors out the two transactions just noted.