Core Earnings & Earnings Distortion

Core Earnings measure the normalized operating profitability of a business.

Fact: only our research captures material unusual gains/losses in footnotes that legacy research providers miss.
Proof: Core Earnings: New Data & Evidence, featured in The Journal of Financial Economics.

Fact: our Core Earnings & Earnings Distortion data delivers a novel source of alpha for quants and PMs.
Proof: Earnings Distortion: The New Value Factor.

Core Earnings + Earnings Distortion  = Reported Earnings

The Problem

Identifying unusual items that distort reported and consensus earnings is increasingly difficult. So difficult that most analysts and data providers don't do it – as proven in The Journal of Financial Economics (JFE).

The Answer

Our Robo-Analyst technology enables us to provide the best database of unusual items in the world and, as a result, provide the best measure of Core Earnings & Earnings Distortion in the world and the first new Value Factor in 40+ years.

Learn about our Earnings Distortion Score

Figure 1: How to Calculate Core Earnings

Total Revenue
+ Total Operating Income
­– Total Reported Operating Expenses, Net
+ Total Hidden Non-Operating Expense, Net
– Reported Interest Expense/(Income), Net
– Reported Losses/(Income) from Unconsolidated Subsidiaries, Net
– Unreported Employee Stock Option (ESO) Expense
– Cash Taxes on Core Earnings
– Reported Minority Interest Expense, Net
– Reported Preferred Dividends, Net
– Reported Dividends on Redeemable Preferred Stock, Net

= Core Earnings

Sources: New Constructs, LLC and company filings

For more details on our calculation of Core Earnings, including the hidden and reported items we collect, we provide case studies here. For details on the difference between the “Reported” and “Hidden” items, click here. Note that data feeds with Earnings Distortion details are typically sold only to Insitutional members.

Earnings Distortion = Net Income Minus Core Earnings

Earnings Distortion is the non-core, non-operating, and unusual gains/losses that must be stripped out when calculating Core Earnings. It equals reported earnings minus Core Earnings. Figure 2 shows the key components of Core Earnings distortion. The higher the Earnings Distortion, the more overstated reported earnings are. The lower the Earnings Distortion, the more understated reported earnings are.

Figure 2: Components of Earnings Distortion

   + Earnings Distortion from 11 Categories of Hidden Items, Net
   + Earnings Distortion from 13 Categories of Reported Items Pre-Tax, Net
   + Income Tax Distortion
   + Earnings Distortion from 2 Categories of Reported Items After-Tax, Net

   = Total Core Earnings Distortion, Net

Sources: New Constructs, LLC and company filings

You need a Stock Tracker 50 Membership or higher to view all the content on this page.

Already a member?

Learn more about our research here.

Want To Learn More?

Sign up to receive free alerts about all our new research reports including Long Ideas and Danger Zone picks.

Get Investment Research That Reads the Fine Print