Definition
The term core operating earnings refers to a metric proposed by Standard & Poor's that adjusts operating earnings to bring clarity to a company's performance. Core operating earnings both includes and excludes items from operating earnings.
Calculation
Core Operating Earnings = Operating Earnings + Additions - Exclusions
Where:
Additions include expenses associated with stock options, purchased R&D costs, restructuring charges associated with ongoing operations, costs associated with pension funds, and the write down of assets.
Exclusions include impairments of goodwill, losses and gains associated with the sales of assets, gains on pension funds, unrealized gains associated with hedging activities, costs related to mergers and acquisitions, and litigation and insurance costs.
Explanation
Operating performance measures allow the investor-analyst to understand how well a company is performing with respect to sales, margins, and profits. One of the ways to measure the effectiveness of a company's core business is by calculating their core operating earnings.
A variety of Generally Accepted Accounting Principles (GAAP) are used by management teams to mask the actual performance of their companies. To provide investors with insights into the performance of a company, S&P developed a metric known as core operating earnings (COE). As the name implies, the intention of this metric is to reveal the true performance of the company's core business operations. This adjustment is achieved by adding back certain expenses and excluding certain gains as shown in the calculation above.
While the metric is useful when trying to understand the true performance of the company relative to what was reported, it is a historical metric. As such, COE is not indicative of future results.
Example
Company ABC's most recent annual report indicated earnings of $15,700,000. The following adjustments were made to derive the company's core operating earnings as shown in the table below.
Operating Earnings | 15,700,000 |
Employee Stock Options | 200,000 |
Purchased R&D | 300,000 |
Pension Fund Expenses | 800,000 |
Sale of Asset (Loss) | -750,000 |
Unrealized Gain From Hedging Activities | -1,250,000 |
Net Income | 15,450,000 |
Related Terms
- The term operating leverage ratio refers to a metric used to understand the extent to which fix costs can generate profits. The operating leverage ratio achieves this objective by comparing fixed costs to operating income.
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The term core growth rate refers to a metric that removes all non-core revenues to bring clarity to a company's performance. Core growth rate is typically measured over a five year timeframe.Moneyzine EditorJanuary 12th, 2024
The term cash flow from operations ratio refers to a metric that allows the investor-analyst to understand if a company is depleting its cash reserves. The cash flow from operations ratio can use income from operations or net income.Moneyzine EditorNovember 6th, 2024
