Why F.A.S.T. Graphs™ Reports Five Versions Of Earnings

F.A.S.T. Graphs displays five separate earnings mnemonics. These include:

  • Adjusted (Operating) Earnings (Default mnemonic)
  • Normalized Basic Tax-Adjusted Earnings
  • Normalized Basic Earnings
  • Basic Earnings
  • Diluted Earnings (GAAP)

Each one describes the underlying profitability of a company in a slightly different manner. Keep in mind that these metrics are often more similar than different, but they do vary from business to business.

Here are the explanations for those five metrics:

Adjusted (Operating) Earnings – The problem with basic and diluted earnings are that they may not accurately or adequately reflect the health of the business or the underlying earnings power of the company, because of the potential inclusion of unusual items that are not expected to occur every year.

Consequently, many companies will report “adjusted,” “non-GAAP” or “operating” earnings. Since this version of earnings excludes special items and nonrecurring charges, they are thought to better reflect or perhaps paint a clearer picture of the actual operating results of the respective company’s business. In other words, special items are excluded because they are not considered regular or constant expenses or benefits required for the day-to-day operations of the business.

Normalized Basic Tax-Adjusted Earnings – Under the current version of F.A.S.T. Graphs™, we go one step farther and calculate a version of earnings titled Normalized Basic Tax-Adjusted Earnings. The only difference with our version and S&P’s normalized calculation is that we apply the actual year-by-year tax rate for each company in our calculation. We believe this provides a more precise iteration of earnings that have been traditionally referred to as operating earnings before the normalizing concept came in vogue.

Normalized Basic Earnings – Unfortunately, “adjusted” earnings are not always provided or reported by the company. As such, we also supply Standard & Poor’s calculation of “normalized” earnings. Note that this is quite similar to “adjusted” earnings in that the calculation tries to remove special or nonrecurring items. However, this metric can vary from what a company reports as S&P Capital IQ can utilize a different methodology. Since operating earnings include tax expenses many companies such as Capital IQ attempt to standardize this version of earnings by universally applying a 37.5% tax bracket. Capital IQ refers to this version of earnings as Normalized Basic Earnings.

Basic Earnings – For US companies under generally accepted accounting principles, also known as GAAP, corporations will usually report Basic Earnings on their financial reports and statements (international companies are also held to an international accounting standard). In its simplest form basic earnings equal net income divided by shares outstanding.

Diluted Earnings (GAAP) – In addition to basic earnings companies report diluted earnings, which include the potential impact for any outstanding options that would be dilutive to shareholders when exercised. Both basic and diluted earnings can include special items such as one-time charges and/or other nonrecurring items.

In sum, basic and diluted earnings come directly from the company’s financials and are subject to widely accepted accounting principles. However, these metrics might include special, unusual or nonrecurring expenses or benefits that are not expected to occur on a regular basis. As such, many companies report “adjusted,” “non-GAAP” or “operating” earnings to better reflect the underlying earnings power of the company. Experience has shown that this version of operating earnings usually presents the best correlation between earnings and stock price. In other words, stock price tends to track and correlate to operating earnings more closely than versions of earnings that also includes special items. Stated differently again, the market tends to ignore nonrecurring charges when pricing a stock in the public marketplace. Thus this metric is the default mnemonic used by F.A.S.T. Graphs.

However, occasionally we are not provided with this information. From observation these occurrences are infrequent but nevertheless present. As such, we also provide S&P’s calculation of “normalized” earnings along with our tax-adjustment to approximate a company’s “operating” or underlying earnings power.

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