Actual earnings (also commonly known as ‘net income’) are a company's total reported earnings, and are calculated according to standard accounting principles such as the Generally Accepted Accounting Principles (GAAP). The earnings are the total profits of a company after all expenses, taxes, and interest have been deducted from revenue. The calculation and presentation of actual earnings is substantially guided by law.
By contrast, adjusted earnings are an unofficial financial measure that modifies actual earnings by removing the effects of non-recurring or non-cash items to provide a clearer view of a company's core business performance.
Adjusted earnings are used by analysts, investors, and companies themselves to get a more accurate picture of a company's sustainable profitability. The most common deductions are non-recurring (one-time events) and non-cash items. Examples include one-time gains or losses like profit from selling a piece of real estate or the loss from a factory fire, restructuring charges like severance pay or the cost of giving employees company stock options, which is a non-cash expense.
The idea is that by removing these distorting factors, adjusted earnings aims to highlight the ongoing operational health of the business, making it easier for investors to compare a company's performance over different periods and against its competitors.
The trouble comes when companies treat too many recurring charges as non-recurring. For example, restructuring a business incurs costs. If it is done once a decade, then there’s a strong argument for treating them as non-recurring. But if there is annual restructuring, the categorisation is open to challenge.
