Over the past nine months or so, numerous companies have announced special charges or write offs for mortgage related items. These charges have the affect of reducing a company's reported net profits.
Following the Enron debacle, which began with the company's bankruptcy filing on December 2, 2001, Standard & Poor's developed the concept of "core earnings." S&P's goal with the core earnings approach is to remove non-core earnings and add back core expenses to reported earnings. According to an article in Better Investing magazine,
Following the Enron debacle, which began with the company's bankruptcy filing on December 2, 2001, Standard & Poor's developed the concept of "core earnings." S&P's goal with the core earnings approach is to remove non-core earnings and add back core expenses to reported earnings. According to an article in Better Investing magazine,
"Examples of noncore earnings include capital gains, profits from exchange rate fluctuations and pro forma income on investments of pension plans. Expenses left out by some companies included stock options (which weren’t booked as expenses but served as a form of compensation) and restructuring charges."
For an example of the magnitude of some adjustments, the table below provides an analysis of IBM's (IBM) and DuPont's (DD) results from 2002-2006.
Source: Better InvestingAs one compares one company versus another, they should factor in the quality of earnings. A company with no adjustments on an regular basis may be a better investment than one with adjustments reported on a frequent basis year after year.
Source:
The Case for Core Earnings
Better Investing
By: Michael C. Thomsett
February 2008
http://www.betterinvesting.org/Public/Tool+Resources/Articles/0208btlpublic.htm?print=1
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