THE “ADJUSTED EARNINGS” NUMBER THAT CAN MAKE ALMOST ANY COMPANY LOOK BETTER
The company reports one profit number. Then, a few lines later, it shows you another one that is much higher.
Both can be technically calculated from the same financial statements.
The difference is what gets removed.
The second number is often called:
Adjusted earnings.
Or:
Adjusted net income.
Or:
Adjusted EPS.
Or:
Adjusted EBITDA.
These numbers can be useful.
But they can also make a company look much more profitable than its GAAP results suggest.
And the trick is hidden inside the word:
"Adjusted."
START WITH GAAP EARNINGS
GAAP stands for Generally Accepted Accounting Principles.
For U.S. public companies, GAAP financial statements provide the standardized accounting framework used in reported financial statements.
Suppose a company reports:
Revenue: $10 billion
GAAP expenses: $9 billion
GAAP net income: $1 billion
That's the company's reported accounting profit.
Then management says:
"But we believe our underlying earnings were actually $1.5 billion."
Where did the extra $500 million come from?
That's where the adjustments begin.
WHAT CAN A COMPANY REMOVE?
A company might exclude things such as:
The company then presents an adjusted number.
For example:
GAAP net income: $1.0 billion
+ restructuring: $200 million
+ acquisition costs: $150 million
+ stock compensation: $100 million
+ other adjustments: $50 million
= Adjusted net income: $1.5 billion
Suddenly the business looks 50% more profitable.
The arithmetic isn't necessarily wrong.
The question is:
Should all of those costs really be ignored?
THIS IS WHY THE SEC CARES
Non-GAAP financial measures are allowed.
But companies must provide the comparable GAAP measure and a reconciliation showing how they arrived at the non-GAAP number.
The SEC also explicitly warns that an adjustment can make a non-GAAP measure misleading.
One example it gives is excluding normal, recurring cash operating expenses necessary to run the business.
That's an important distinction.
The problem isn't:
"Adjusted earnings exist."
The problem is:
"What exactly did the company adjust away?"
THE "ONE-TIME" EXPENSE THAT KEEPS COMING BACK
This is where things get interesting.
Imagine a company reports:
2023
GAAP profit: $100M
Adjusted profit: $150M
Management says:
"$50M restructuring charge — one-time."
Fine.
Then:
2024
GAAP profit: $110M
Adjusted profit: $165M
Another $55M restructuring charge.
Again:
"One-time."
Then:
2025
GAAP profit: $120M
Adjusted profit: $180M
Another $60M restructuring charge.
Again:
"One-time."
At some point, an investor should ask:
If the company keeps paying it, how "one-time" is it?
The SEC specifically restricts certain adjustments that eliminate or smooth items described as non-recurring, infrequent or unusual when the nature of the charge makes it reasonably likely to recur, or when a similar charge occurred within the prior two years.
STOCK-BASED COMPENSATION IS ANOTHER BIG EXAMPLE
Some companies exclude stock-based compensation when calculating adjusted earnings.
The argument can be:
"This isn't a cash expense."
And there is an important point there.
Stock compensation doesn't necessarily require the company to write a cash cheque immediately.
But it isn't economically meaningless.
If a company gives employees shares or options, existing shareholders can experience dilution.
So an investor might see:
GAAP EPS: $1.20
Adjusted EPS: $1.70
The difference can be substantial.
If the adjustment removes stock compensation, you should ask:
How much equity is the company giving away to employees to generate those earnings?
ACQUISITIONS CREATE ANOTHER CATEGORY
Suppose a company buys another company for $5 billion.
The acquisition creates accounting expenses.
Management might exclude certain acquisition-related costs from adjusted earnings because they believe those costs don't represent the underlying operations of the combined business.
That can be useful for comparing operating performance.
But acquisitions aren't necessarily random accidents.
If the company acquires another business every year, acquisition-related expenses may be part of its actual strategy.
That creates an important question:
Is the company adjusting away something unusual — or something it repeatedly needs to spend money on to grow?
EBITDA CAN MAKE THE NUMBER EVEN BIGGER
Now take the idea one step further.
EBITDA stands for:
Earnings Before Interest, Taxes, Depreciation and Amortization.
Then companies can create:
Adjusted EBITDA.
That may remove additional items considered unusual or non-operating.
Imagine:
GAAP operating profit: $500M
Add back:
Now:
Adjusted EBITDA = $900M
The same business can therefore appear to have:
$500M
of GAAP operating profit,
but:
$900M
of adjusted EBITDA.
Neither number is necessarily "fake."
They are answering different questions.
THE DANGER IS COMPARING THE WRONG NUMBERS
Imagine Company A reports:
GAAP earnings: $500M
Company B reports:
Adjusted earnings: $700M
It might be tempting to conclude:
Company B is more profitable.
But that's not an apples-to-apples comparison.
You need to know:
What did Company B remove?
Maybe the $700M excludes $200M of expenses that Company A included.
Now the comparison looks completely different.
This is why non-GAAP measures should not be viewed in isolation. Companies themselves often describe them as supplemental measures alongside GAAP results.
THE BIGGEST CLUE IS THE RECONCILIATION
When a company presents adjusted earnings, don't stop at the headline number.
Find the reconciliation.
It might look something like:
GAAP net income
↓
+ Stock-based compensation
↓
+ Restructuring
↓
+ Acquisition costs
↓
+ Impairment
↓
− Certain gains
↓
= Adjusted net income
That bridge can be more interesting than the headline earnings figure.
Because it tells you:
What management doesn't want included in its preferred version of profitability.
SOMETIMES THE ADJUSTMENT IS COMPLETELY REASONABLE
This is important.
Suppose a company suddenly pays a huge legal settlement from an unusual lawsuit.
An analyst might reasonably want to understand:
What would normal operations have looked like without this unusual event?
An adjusted number can help answer that question.
Similarly, an acquisition can create accounting effects that make comparisons between periods more complicated.
So adjusted earnings can provide useful information.
The SEC itself recognizes that non-GAAP measures can provide useful supplemental information when presented properly alongside GAAP results.
The problem comes when the adjustments become a permanent part of the story.
THE REAL TEST: DOES THE BUSINESS KEEP PAYING THE EXPENSE?
This is one of the simplest questions an investor can ask.
If management removes:
"Restructuring costs"
ask:
Does the company restructure every year?
If it removes:
"Acquisition costs"
ask:
Does the company acquire businesses every year?
If it removes:
"Stock-based compensation"
ask:
How much stock is being issued every year?
If it removes:
"Impairments"
ask:
Why does the company repeatedly need to write down assets?
An expense doesn't become irrelevant simply because management gives it a special label.
THE WORD "ADJUSTED" IS NOT A MAGIC WORD
This is the biggest misconception.
Adjusted earnings don't mean:
"The real profit."
And GAAP earnings don't necessarily mean:
"The only number that matters."
They provide different perspectives.
GAAP gives you the standardized accounting result.
Adjusted earnings attempt to show management's preferred view of underlying performance.
The useful question is:
What changed between the two?
A SIMPLE EXAMPLE
Imagine a company reports:
GAAP EPS: $2.00
Then it announces:
Adjusted EPS: $3.00
That sounds impressive.
But suppose the reconciliation shows:
$2.00 GAAP EPS
$0.40 stock compensation
$0.25 restructuring
$0.20 acquisition expenses
$0.15 amortization
=
$3.00 adjusted EPS
Now you know something much more important than the $3 number.
You know that $1 of every $3 of adjusted earnings came from expenses being excluded.
The next question is whether those exclusions represent temporary distortions or recurring economics.
WHY COMPANIES USE THESE NUMBERS
There are legitimate reasons.
Adjusted measures can help management and investors:
Compare periods
Compare operating performance
Understand unusual events
Evaluate trends
Assess internal targets
Analyze businesses after acquisitions
Companies also use them in earnings releases, investor presentations and sometimes executive compensation structures.
The SEC therefore regulates how these measures are presented rather than simply banning them.
WHY INVESTORS SHOULD READ BOTH
If you only read GAAP earnings, you can sometimes miss the company's underlying operating story.
If you only read adjusted earnings, you can miss costs that are very real to shareholders.
The better approach is:
GAAP earnings
Adjusted earnings
Reconciliation
Cash flow
What keeps recurring
That gives you a much clearer picture.
THE NUMBER THAT MATTERS MOST MAY BE THE DIFFERENCE
Suppose adjusted earnings rise from:
$500M → $600M → $700M
That looks excellent.
But GAAP earnings are:
$400M → $390M → $380M
Now the story is much more complicated.
The gap between adjusted and GAAP earnings is getting larger.
That doesn't automatically mean something is wrong.
But it means you should investigate.
MAACAT PERSPECTIVE
The word "adjusted" can make a financial number sound cleaner than it really is.
But the adjustment itself is where the story lives.
Don't just ask:
"How much did the company earn?"
Ask:
"How did it get from GAAP earnings to adjusted earnings?"
Then ask:
"Which costs were removed?"
And finally:
"Are those costs actually disappearing — or do they keep coming back?"
A company can legitimately have unusual expenses.
It can legitimately present adjusted results.
But if the same "one-time" expenses appear year after year, the investor should stop treating them as background noise.
The most useful earnings number isn't always the biggest one. Sometimes it's the reconciliation that explains why the numbers are different.
