Pro Forma Earnings

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What are Pro Forma Earnings?

The Pro Forma Earnings of a company is an additional adjusted statement of its profit, unlike the reported accounting profit (US GAAP or IAS or national systems), by excluding transactions or expenses that are unusual, nonrecurring, or otherwise not representative of the company's true business.

Typical items that may be excluded are:

• Restructuring costs.

• Merger and Acquisition costs.

• Depreciation of tangible assets.

• Amortization of intangible assets.

• A change in the value of a company's investments.

• Taxes.

• Employee Stock Options for managers.

• Accounting charges to compensate for earlier mistakes.

Is this type of reporting earnings useful? Advocates say that this helps investors to see through incidental transactions or expenses. Critics on the other hand say pro forma numbers are misleading the investors because there is no defined meaning or standard for it and most "unusual" transactions or expenses should be regarded as part of the regular business. Also they claim there are better ways to inform investors about the true cash flows of the company, such as EVA and MVA.

Investors are wise to always distinguish between accounting profit and pro forma profits. Using pro forma earnings to analyze a firm over time can make sense, using this type of earnings to compare two companies is normally not a good idea.

Pro forma earnings are also referred to as Normalized Earnings.

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