S&P to focus on Core Earnings for analysis

Venkatachari Jagannathan
17 May 2002

Chennai: Core Earnings is what Standard and Poors (S&P), the global rating agency, will hereafter focus on to measure a companys earnings in its analysis and debt rating. S&Ps move towards Core Earnings is in the wake of bad reporting by several US companies, resulting in bankruptcies of several high-flying groups and huge losses for the investors when the chickens came to roost.

World over corporates resort to three sort of reporting as reported earnings (includes all earnings excluding discontinued operations and extraordinary items as defined by Generally Accepted Accounting Principles, or GAAP), operating earnings (considered equivalent to as reported earnings with some one time charges reversed) and finally Proforma earnings (originally it meant a special analysis of a major change, such as merger where adjustments were made for an as if review).

But of late, in respect of Proforma earnings, as if has come to denote, as if the company didnt have to cover proper expenses. The method was largely abused and it has come to be known as EBBS (earnings before bad stuff), says an S&P white paper on Core Earnings.

The increased use of so-called pro forma earnings and other measures to report corporate performance has generated controversy and confusion and has not served investor interests. S&P Core Earnings definition will help build consensus and restore investor trust and confidence in the data used to make investment decisions, says S&P president Leo ONeill.

Core Earnings is an excellent analytical tool for the individual and professional investor alike, says Kenneth Shea, managing director for global equity research at S&P. It allows investors to better evaluate and compare the underlying earnings power of the companies they are examining. In addition, it enhances an investors ability to construct and maintain investment portfolios that will adhere to a pre-determined set of investment objectives.

So what is Core Earnings? As there is good understanding of what is included in as reported earnings all earnings excluding discontinued operations and extraordinary items as defined by GAAP S&P takes that as the starting point to arrive at companys Core Earnings.