Financial Statement Basics

GAAP / Non-GAAP (Adjusted Earnings)

Generally Accepted Accounting Principles / Non-GAAP

The difference between official earnings reported under set accounting standards (GAAP) and the adjusted (Non-GAAP) earnings a company reports separately by excluding certain items.

In plain terms

GAAP is "the accounting rules everyone agreed to follow." US-listed companies must report official results under these rules, because a common yardstick is what makes companies comparable.

But companies often also report Non-GAAP (adjusted) earnings excluding certain items, saying "this cost is one-off or non-cash, so see our real strength this way" — excluding, for instance, the cost of stock given to employees (stock-based compensation) or restructuring costs.

What it tells you

Non-GAAP can clear away one-off noise to show the core-business flow, but it can also be a tool to dress results up to "look better." So when the gap between the two is large, you have to look at "what the company wants to leave out."

When a news headline says EPS beat expectations, the meaning differs depending on whether it is GAAP or adjusted EPS. Usually what a company touts is the better-looking adjusted figure.

Formula

GAAP = official earnings computed under set accounting standards
Non-GAAP (adjusted) = computed separately by the company, excluding certain costs (stock compensation, restructuring, etc.) from GAAP

What high or low means

Adjusted earnings being slightly larger than GAAP earnings is common. But if that gap is large every year and the excluded items recur (e.g. continually excluding stock compensation as "one-off"), treat that adjustment with caution.

The crux is whether the excluded items are truly one-off (restructuring, lawsuit settlements) or in fact a recurring real cost every year.

Caution

If items excluded as "one-off" appear year after year, they are no longer one-off. Stock-based compensation (SBC) in particular is often excluded on the grounds that no cash goes out, but it is a real cost that dilutes shareholders' stakes as the share count rises.

Non-GAAP varies in what each company excludes, making company-to-company comparison hard. For a comparison base, GAAP with its common rules is safer.

A company that touts adjusted earnings loudly while printing GAAP small is a signal to check once more "why that difference exists."

Metrics to read alongside

SBC (Stock-Based Compensation)

The item most often excluded from Non-GAAP is stock-based compensation (SBC). The larger SBC is, the wider the gap between adjusted and GAAP earnings, so together they reveal what that adjustment was made by leaving out.

Operating Margin

When a company touts an "adjusted operating margin," it can look better than the GAAP operating margin. You have to tell which figure it is to read core-business profitability accurately.

See it in real stocks

Search US stocks on Stocklore to see GAAP and other financial metrics alongside the sector average.

AAPL Apple Inc.MSFT Microsoft Corporation NVDA NVIDIA Corporation AMZN Amazon.com, Inc.Search stocks →

Exactly how Stocklore computes this metric (formula, thresholds, SEC source) is on the methodology page.

This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.