Opinion

Non-GAAP Earnings: Wishful Thinking or Real Profits?

Baruch Lev

By Baruch Lev

By Baruch Lev

On April 30, the Clorox Co. (CLX) reported its financials for the quarter ended in March 31: Sales, $1.78 billion, were almost identical to same quarter a year earlier, but GAAP (generally accepted accounting principles) earnings - a loss per share of 49 cents - tumbled 126% year over year. The reason: the company recognized in the recent quarter a $329 million impairment (loss of book value) charge of goodwill and trademarks in its health, vitamins, and supplements business. Nothing unusual here - hundreds of companies decrease (impair) their goodwill values every year.

What drew wide attention was Clorox's release of an "adjusted non-GAAP earnings" per share number of $1.62, after adding (canceling) the $2.11 impairment loss per share to the GAAP loss of 49 cents. So, in terms of non-GAAP earnings, recent quarter EPS was only a modest 14% lower than a year earlier, rather than the 126% drop on a GAAP basis. Quite a difference.

Clorox justified the elimination of the goodwill impairment charge from earnings as follows: "Management believes that the presentation excluding the impairment charges is useful to investors to assess operating performance on a consistent basis by removing the impact of impairment charges…"

Read the full Seeking Alpha article.

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Baruch Lev is the Philip Bardes Professor of Accounting and Finance.