The "bottom line" of the income statement, or net earnings, is a widely understood dollar value. Also called profit or net profit, it is the amount left over after deducting all costs and expenses from revenue. But it is not the "real" profit a company earns. For that you need to track core earnings.
This is a calculation that adjusts net income to add or remove specific income statement entries. The purpose is to isolate the company's core earnings, which are those earnings from its primary market activity and excluding non-recurring or non-core items on the statement. This is not a minor adjustment in every case; the difference between reported net earnings and recalculated core earnings can be substantial.
Examples of what gets taken out of net income to arrive at core earnings are:
- gains from pension investing
- income from selling capital assets
- settlements of litigation and insurance claims
- expenses for employee stock options
The calculation gets technical for some items, but the important thing to remember is that core earnings is a more accurate estimate of the true year-to-year earnings from operations. Some companies, such as Wal-Mart (NYSE:WMT), report practically no annual adjustments between net income and core earnings. Others, like DuPont (DD), have in recent years had substantial differences between net and core earnings.
The effect on most financial ratios is potentially great enough to make the difference between picking or rejecting a company as an investment. So a study of core earnings could affect your decision to pick one company over another.
To find core earnings adjustments for each year, the best source is the S&P Stock Reports, which are provided free of charge to investors and traders on several of the more popular online brokerage firms. For example, traders with accounts at Charles Schwab can access the S&P Stock Reports for all companies for whom the analysis is performed.
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