Pro-forma earnings are financial statements with hypothetical estimates that provide a "picture" of a company's profits if certain nonrecurring items are excluded. They may allow companies to elaborate their earnings figures, and investors should be wary of the data. The 澳洲幸运5官方开奖结果体彩网:Securities꧒ and Exchange Commission (SEC) investigates companies suspected of trying to deceive investors or misrepresent ℱperformance.

What Are Pro-Forma Earnings?

Pro-forma earnings are estimates on business financial statements that project a company's profits, excluding nonrecurring gains or losses. 澳洲幸运5官方开奖结果体彩网:Pro-forma earnings are not computed using standard 澳洲幸运5官方开奖结果体彩网ꦐ:Generally Accepted Accounting Principles (GAAP) and may leave out one-time expenses, such as restructuring costs following a merger.

A pro forma financial statement can exclude anything a company believes obscures the accuracy of its future outlook. GAAP 澳洲幸运5官方开奖结果体彩网:net income is the "official" profitability determined by 澳洲幸运5官方开奖结果体彩网:accountants, but pro-forma earnings can also be informative. For example, net income doesn't reflect a company's financial picture if a company has 澳洲幸运5官方开奖结果体彩网:one-time charges irrelevant to future p🧸rofitability. A co🍰mpany appears profitable even when losing money by omitting items that reduce earnings.

Company Reports

Companies may release earnings reports that exclude 澳洲幸运5官方开奖结果体彩网:stock-based compensation and acquisition-related expenses. When reporting pro forma earnings, companies may remove unsold inventory from 澳洲幸运5官方开奖结果体彩网:balance sheets. However, pro forma doesn't mean the numbers are automatically manipulated. For some companies, pro-forma earnings provide a more accurate view of their 澳洲幸运5官方开奖结果体彩网:financial performance because of the nature of their businesses.

Companies in certain industries utilize pro forma reporting more than others. For example, telecommunication companies rarely make a net 澳洲幸运5官方开奖结果体彩网:operating profit because they write down depreciation costs. When a company under💦goes restructuring or completes a merger, one-time charges can oc꧅cur. These types of expenses do not compose part of the ongoing cost structure of the business and, therefore, can unfairly weigh on short-term profit numbers.

Pro forma statements are useful to corporate managers and 澳洲幸运5官方开奖结果体彩网:investment banks to assess operations and assist in the 澳洲幸运5官方开奖结果体彩网:valuation of takeover targets.

How Investors Evaluate Earnings

Pro-forma earnings give investors a view of a company's operations. However, they are not regulated financial statements falling under GAAP rules. Because traders and brokers focus so closely on whether or not 澳洲幸运5官方开奖结果体彩网:a company beats or me🦩ets analyst🦋 expectations, the headlines that follow 澳洲幸运5官方开奖结果体彩网:earnings announcements are important.

If a company misses non-pro-forma expectations but states that it beats the pro-forma expectations, its stock price may react positively in the 澳洲幸运5官方开奖结果体彩网:short term. To evaluate the legitimacy of pro-forma earnings, investors should look at what costs are excluded. Intangibles like 澳洲幸运5官方开奖结果体彩网:depreciation and goodwill are acceptable to 澳洲幸运5官方开奖结果体彩网:write down occasionally, but if the company repeats this every quarter, the reasons for doing so might be questionable.

The Bottom Line

Pro-forma🍨 earnings are informative but investors sho💧uld discern why a company treats its earnings as such. Pro-forma figures do not face the same level of scrutiny as GAAP earnings and are not subject to the same level of regulation.