Adjusted EPS

It is common to use headline or adjusted EPS rather than basic EPS to get a better view of underlying performance and trends. The usual adjustment is reversing the effect on profits of exceptional items and other one-offs such as impairments. These are excluded because they do not help investors estimate future cashflows.

Companies often disclose their adjusted EPS. Analysts forecasts are usually of the headline EPS as well. The exact definition varies and different companies and analysts use different adjustments.

Problems with adjusted EPS

The main problem with adjusted EPS occurs when one relies on company numbers. It is an easy number to manipulate. Even an investor calculating their own adjusted EPS number is likely to rely on numbers a company has wide discretion over (such as what is classified as exceptional).

The IIMR (Institute of Investment Management and Research) has set out a widely used definition of headline EPS. This defines certain items that are excluded regardless of whether the company concerned has classified them as exceptionals or not, thus allowing fair comparison of companies that may have different approaches to classifying expenses as exceptional. This helps, but does not solve the problem (because of the wide discretion a company has over vital numbers).

Some of the adjustments are clear, and improve the unadjusted numbers in obvious ways: in particular the stripping out of non-cash numbers such as impairments and amortisation.

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