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Adjusted Earnings: What to Check Before Excluding Special Items

Steven Levine, Founder of TickerPosts and OpenClassActions.com1 min read
Close-up of hands using a calculator and recording figures in a notebook.
Illustrative photo by Kaboompics.com on Pexels

Companies sometimes publish an adjusted profit measure alongside GAAP earnings. Excluding a restructuring charge or impairment can help readers compare periods, but an adjustment should prompt a question: what was removed, why, and how often has a similar item appeared?

Start with the GAAP number and reconciliation

For non-GAAP financial measures covered by Regulation G, 17 CFR § 244.100 requires presentation of the most directly comparable GAAP measure and a reconciliation. Historical reconciliations are quantitative. The SEC's staff interpretations also discuss cases where inconsistent adjustments across periods can make a non-GAAP presentation misleading.

For an investor, the reconciliation is a useful map. It shows whether management removed stock-based compensation, acquisition costs, restructuring, impairment, litigation or another item, and whether the adjustment changed from one quarter or year to the next.

Ask whether an unusual item is really unusual

A charge may be infrequent for one company but recur across several years. Repeated restructuring, acquisition integration or asset write-downs may be part of how the business operates or invests. Excluding such costs can make a trend look smoother while understating the resources the company uses.

The same issue matters for market-wide measures. Palazzo's CAPE-H paper excludes special items from historical earnings to reduce comparability problems. That choice is a research design decision; it does not mean every excluded company expense is economically irrelevant.

Compare like with like

When you compare earnings across time, use the same definitions where possible. Record which adjustments are included, check whether prior periods were recast, and compare adjusted profit with cash flow and share count. If the adjustment list grows while the headline measure improves, the reconciliation may tell a different story from the headline.

This is a framework for reading disclosures, not a conclusion that adjusted earnings are always unreliable. For how one research paper applies special-items adjustments to a long-run market ratio, see CAPE-H explained and the rest of CAPE, Accounting and Long-Term Stock Returns: A Plain-English Pillar Guide.

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