Headline earnings is a subset of the total profits reported by a business. These earnings are useful for a financial analyst who wants to determine the earnings level of the core day-to-day operations of a business, without other ancillary transactions cluttering up the earnings information. It is also useful for comparing the results of the core operations of similar businesses within the same industry.
When a business reports headline earnings, it is only including the following earnings:
- Profits or losses generated by operations
- Profits or losses generated by investment activities
The headline earnings concept does not include the following types of earnings:
- Profits or losses caused by the sale of assets
- Profits or losses caused by the termination of discontinued operations
- Profits or losses caused by write-downs in the value of assets
- Profits or losses caused by reductions in the number of employees
The concept can also be applied to earnings per share to arrive at headline earnings per share.
The presentation of headline earnings is not allowed under Generally Accepted Accounting Principles or International Financial Reporting Standards, and so is not allowed within a company's financial statements. Thus, it is more of a public relations or financial analysis concept than an accounting concept.
If a publicly held company were to report headline earnings, SEC regulations require it to also present a reconciliation back to the net income of the business, explaining any differences between the reported measurements.
For example, ABC International reports $100,000 of earnings in its most recent quarter, which includes a $10,000 gain on the sale of fixed assets and a $30,000 impairment charge on other fixed assets. The headline earnings for ABC would be $120,000, which factors out the two transactions just noted.