What it means
Reported profit is often distorted by events that say nothing about how the business actually traded. Selling a building at a gain, writing down goodwill after a disappointing acquisition or receiving insurance money after a fire all move the bottom line without telling you anything useful about the core operation.
Headline earnings address that by starting with profit attributable to ordinary shareholders and then removing those capital items. What remains is intended to represent sustainable trading performance, the profit the business could reasonably expect to repeat.
The measure has its clearest definition in South Africa, where listed companies report headline earnings and headline earnings per share alongside the statutory figures. In other markets, analysts and companies compute something very similar and call it underlying profit, adjusted earnings or normalised earnings.
Managers value the measure because it makes periods comparable. If last year included a $4,000,000 property gain and this year included nothing of the kind, comparing statutory profit alone would suggest a collapse that never happened in the operating business.
The nuance, and the standing criticism, is that adjusting can become a habit. When a company excludes restructuring costs in every single year, those costs are arguably just part of running the business, so a careful reader always checks the statutory profit sitting next to the headline number.
For managers outside finance, the useful habit is to ask two questions of any adjusted figure: what exactly was taken out, and would the same item appear again next year? Where a definition is set by a reporting standard the answers are consistent, and where it is set by the company itself they deserve a closer look.
In practice
Real-world examples.
Example
A listed food producer reports statutory profit down 30% after impairing a failed overseas venture. Headline earnings are up 6%, and the investor presentation leads with that figure while the statutory result appears immediately beneath it.
Example
An analyst comparing three property-owning retailers finds statutory profits impossible to line up, because each sold a different number of stores during the year. Recalculating headline earnings puts all three on the same trading basis.
Example
A remuneration committee ties the executive bonus to growth in headline earnings per share. The intention is to reward trading performance rather than a well-timed disposal of a warehouse.
Think of it
“Headline earnings filter out the noise-core profits without one-time items distorting the picture.
Formula
Calculation
Headline Earnings = Profit Attributable to Ordinary Shareholders, adjusted to remove separately identifiable remeasurements of capital items, each taken net of tax and of any minority interest.
Headline Earnings Per Share = Headline Earnings / Weighted Average Number of Shares in Issue.
Suppose a listed retailer reports profit attributable to ordinary shareholders of $18,000,000. That figure includes a $5,000,000 gain on the sale of a distribution centre, taxed at 20%, and a $2,000,000 goodwill impairment with no tax effect.
After-tax gain on the property = $5,000,000 - ($5,000,000 multiplied by 0.20) = $5,000,000 - $1,000,000 = $4,000,000.
Headline earnings = $18,000,000 - $4,000,000 + $2,000,000 = $16,000,000.
With 40,000,000 shares in issue, headline earnings per share = $16,000,000 / 40,000,000 = $0.40, compared with statutory earnings per share of $18,000,000 / 40,000,000 = $0.45.Case study
Seen in the real world.
Copperbrook Retail Group is a fictional listed chain invented to illustrate the measure. In one year it sold two city-centre stores for a $12,000,000 after-tax gain and reported statutory profit of $31,000,000, its best result on record. Trading profit had in fact fallen slightly.
Its headline earnings, at $19,000,000, told the honest story, and the finance director led the results announcement with that number rather than the flattering statutory figure. Analysts in this illustrative account responded well, because the following year had no property sales in it and a statutory comparison would have looked disastrous.
The fictional board went a step further and rebased the executive bonus scheme on headline earnings per share. Nobody would then be rewarded for selling a store, and the management team's attention stayed on trading margins and stock turn, which were the things it could genuinely influence.
Watch out
Common mistakes.
- Treating headline earnings as a replacement for statutory profit, when it is an additional view meant to be read alongside the audited figure.
- Assuming every company calculates it the same way, when outside markets with a formal definition the adjustments vary considerably.
- Excluding costs that recur year after year, such as annual restructuring charges, and then calling the result sustainable trading performance.
Questions
People also ask.
Is headline earnings the same as EBITDA?
No; EBITDA removes interest, tax, depreciation and amortisation, while headline earnings keeps all of those and removes capital gains and losses instead.
Why not just use statutory profit?
You should look at it, but statutory profit mixes trading results with one-off asset events, which makes year-on-year comparison unreliable.
Can headline earnings be higher than statutory profit?
Yes, and that happens whenever the excluded items are net losses, such as a large impairment being added back.
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