What it is:
How it works (Example):
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 it Matters:
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.