Six Key Earnings Terms Every Investor Should Know

3 5 minutes read

Six Key Earnings Terms Every Investor Should Know

The quarterly corporate earnings reporting ritual, when profit “beats” and “misses” move stock prices, is akin to a Wall Street confessional in which chief executives and chief financial officers reveal to investors how much money they made – or lost.

But deciphering earnings reports is tricky because companies report their numbers in a variety of ways.

You’ll see GAAP earnings – and non-GAAP earnings. Operating profits. Pro-forma earnings. Diluted earnings. EBITDA. This jargon soup can make a novice investor’s head spin.

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What do these different earnings measures mean? And which ones deserve your attention as you evaluate a company’s earnings power? Before diving in, it’s important to identify why profits matter.

Why do earnings matter?

Owning stock gives you a share of ownership in a company and a claim on its profits.

“Stocks and markets follow earnings and earnings estimate revisions,” says Katherine Shaw, a portfolio manager at Fidelity Investments. “At its core, a stock’s price reflects what the market believes a company is worth.”

The math is simple: Earnings per share multiplied by price-to-earnings (P/E) multiple equals the stock price.

It’s hard to value a stock and know what its prospects are if you don’t have a good handle on what it earns now and will earn in the future.

No doubt, Wall Street and Main Street will be closely scrutinizing earnings and CEO projections in 2025 amid rising recession fears and uncertainty about the impact of President Donald Trump’s tariffs and other economic policies. Here’s a guide to the ABCs of corporate profit reporting.

GAAP

The acronym stands for generally accepted accounting principles. This profit metric follows standardized accounting rules that all publicly traded companies must follow.

GAAP earnings include all the warts. The method includes all the money coming in from sales (revenue) and all the money going out (expenses), no matter the reason.

“GAAP includes all charges and all costs, whether they are recurring or not,” says Jeff Buchbinder, chief equity strategist at LPL Financial.

But CEOs say GAAP reporting can paint a misleading picture. It doesn’t back out so-called one-off expenses – such as severance costs related to corporate downsizing, or legal expenses and costs incurred in acquiring a business – which don’t reflect ongoing business performance or core profitability. As a result, GAAP reporting can skew the true future profitability of a company.

Non-GAAP

Non-GAAP profit reporting adjusts GAAP figures to exclude and deduct non-recurring and non-operating expenses, such as non-cash stock-option costs, merger and acquisition expenditures, business restructurings, and divestitures.

Corporate CFOs and Wall Street analysts “strip out some things that happened in the past that aren’t really relevant when assessing a company’s business prospects in the future,” says Buchbinder.

Nearly all companies (97%) in the S&P 500 Index currently use non-GAAP measures in communicating results to investors, according to consulting firm PwC. “These figures often provide valuable insight and are widely used,” says Shaw.

Non-GAAP earnings are typically higher than GAAP results. Health insurer Humana (HUM), for example, reported full-year 2024 GAAP income of $1.72 billion and earnings per share of $9.98.

But the company’s adjusted, non-GAAP income topped $2.70 billion, and earnings per share jumped to $16.21 after backing out a number of expenses – including, for instance, charges associated with the company’s exit from a line of insurance business.

It’s not uncommon for a company that loses money on a GAAP basis to become a money-maker when one-time expenses are stripped out using non-GAAP reporting.

For example, Stratasys (SSYS), an American and Israeli maker of 3-D printers, reported a full-year 2024 net loss of $120.3 million using GAAP. But after removing non-recurring expenses, Stratasys posted non-GAAP net income from operations of $4.2 million.

Bear in mind that adjustments to GAAP earnings vary from company to company and are not standardized.

“Investors should carefully review what items are being added or removed when comparing non-GAAP numbers,” Shaw says.

Operating earnings

Operating earnings focus on a company’s profitability from its core business activities. It’s what’s left after deducting the cost of merchandise, as well as expenses such as wages, rent and utilities.

Operating income is often synonymous with EBIT, which stands for earnings before the effects of interest and taxes.

“The earnings number that’s reported by companies and by the media is typically going to be operating earnings,” says Buchbinder, and it is often what’s referred to when reporting whether a company exceeded quarterly profit expectations or fell short.

For example, in its fourth quarter ending January 26, artificial intelligence chip designer Nvidia (NVDA) reported non-GAAP operating net income of $22.1 billion, which beat analysts’ expectations of $19.8 billion. (That worked out to 89 cents per share, topping Wall Street’s estimate of 84 cents.)

EBITDA

This acronym stands for earnings before interest, taxes, depreciation and amortization. “EBITDA provides insight into a company’s cash generation,” says Shaw.

This earnings measure is illuminating for firms in capital-intensive businesses that buy a lot of machinery, the value of which depreciates over time, explains Buchbinder.

GAAP earnings recognize that depreciation expense over time. “The depreciation may come out of your earnings for the next three years, but the cash cost was up front,” says Buchbinder.

That expenditure is not recurring, so it doesn’t impact cash flow in the future, he says, adding, “EBITDA is a proxy for cash flow.”

Pro forma

This earnings calculation includes or excludes items to illustrate what earnings might look like under a certain scenario, Shaw explains.

Pro forma reporting is different from “adjusted” earnings, which modify actual results. “Pro forma results combine actual results with some other set of hypothetical numbers,” says Shaw.

This can help investors understand potential performance if a company is going through a significant event, such as a merger, acquisition or divestiture.

For example, companies often spin off non-performing businesses that are dragging down overall results. With pro-forma earnings, says Buchbinder, the company can tell a different, more bullish post-spin-off story to Wall Street: “Hey, you know what? We were growing at 10%. But if it weren’t for this dead weight, we would have grown at 15%.”

Diluted earnings

Aimed at providing a truer representation of a company’s future earnings per share, diluted earnings take into account not only the currently outstanding shares but also additional shares from stock options, or convertible debt or other securities that could later be converted to common stock.

When determining whether a stock has beaten or missed profit expectations, Shaw says she uses earnings adjusted for non-recurring items and diluted on a per-share basis.

“This creates a more apples-to-apples comparison of a company’s actual performance against analyst expectations,” she says.

Earnings aren’t the only measure of a company’s health. For tech companies, for example, especially those in growth phases, monthly user growth and customer acquisition costs are important.

A better gauge for retail and restaurant chains might be comparable same-store sales.

And it’s important to look beyond headline earnings reports, says Shaw. Consider two restaurant chains with the same stock price and identical earnings, but one achieved its results despite declining sales via lower costs, while the other shows healthy same-store growth.

“Most investors would favor the second company,” she says.

This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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