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What is Non-GAAP?

April 10, 2014

Non-GAAP

Virtually every earnings season, or any time a firm releases its earnings results, there are several types of headlines that have the potential to cloud the earnings figures. There are always the earnings derived from using generally accepted accounting principles (GAAP), which are what drive analyst estimates, investor presentations, and credit ratings. There are, in addition, several other adjustments and items that are mentioned — these alternate measurements and adjustments usually improve the results of earnings.

Non-GAAP– these types of earnings might have to do with types of cash flow operations especially to do with real estate investment trusts (REITs), master limited partnerships (MLPs), or other types of business more dependent on cash flow than net income.

Non-recurring — ideally these items would truly be one-off events, never to be heard from again. Examples of such items are restructuring charges, items related to spin-offs and/or acquisitions. Sometimes, however, especially since the financial crisis firms have used the title of non-recurring for items that recur over and over again (debt impairments are a common example).

On top of these two primary methods of adjusting earnings results, there are other firms, including Tesla, that always report both GAAP earnings and non-GAAP earnings. Although there must be perfectly justifiable reasons for using alternative earnings measurements at certain times, it is something to keep an eye on. GAAP based earnings are the drivers of audited financial statements, marketplace estimates, and should always be referred to despite whatever other metrics are used.

Below is an excellent link from business insider covering the pros and cons of using non-GAAP earnings.

Happy Reading!

http://www.businessinsider.com/gaap-vs-non-gaap-earnings-eps-2013-12

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