What are Headline Earnings?
How Do Headline Earnings Work?
To measure headline earnings, we begin by backing out any revenue that did not come from the company's core business. To illustrate:
Income Statement for Company XYZ
Sales Revenue $500
Operating Expenses ($300)
Sale of Non-Operating Assets $400
Capital Expenditures ($100)
To calculate headline earnings, we start with revenue from sales and subtract operating expenses and capital expenditures ($500 - $300 - $100 = $100). Note that we did not include the income from the sale of non-operating assets because those assets don't have anything to do with the core business the company is in.
Why Do Headline Earnings Matter?
The headline earnings method accounts for revenue generated through business-as-usual activities, that is, ongoing operations or investment activities that increase a company's bottom line. This method helps financial analysts obtain a clearer picture of a company’s ability to generate revenues from its core business activities rather than from non-recurring events such as cost-cutting, sales of assets or accounting write-downs.
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