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Non-GAAP Metrics are common in corporate earnings reports, giving investors additional information alongside figures prepared under U.S. GAAP. When a public company reports quarterly earnings, investors often see two versions of financial performance: results prepared under U.S. GAAP and additional measures described as non-GAAP.
GAAP, or Generally Accepted Accounting Principles, provides the standardized framework companies use for their financial statements. Non-GAAP measures are additional financial metrics that make adjustments to GAAP figures.
These measures can help investors understand how management views the company’s underlying performance. But they also give companies flexibility in deciding which items to exclude.
That is why the Securities and Exchange Commission continues to pay close attention to how non-GAAP metrics are presented.
The issue is not simply whether a company uses non-GAAP numbers. The SEC’s guidance focuses on whether those measures are clearly presented, properly reconciled, and potentially misleading.
What Are Non-GAAP Metrics?
Non-GAAP financial measures are figures that differ from, or are not calculated in accordance with, the most directly comparable GAAP measure.
Common examples include:
- Adjusted EBITDA
- Adjusted EPS
- Adjusted net income
- Free cash flow
A company might report a GAAP net loss while also reporting adjusted net income after excluding certain expenses.
For example, a technology company could report a GAAP loss after recording stock-based compensation, restructuring costs, or acquisition-related expenses. Management may provide an adjusted measure that excludes some of those items.
The purpose is generally to provide additional context around operating performance.
But the usefulness of the measure depends heavily on what is being adjusted and how clearly the company explains those adjustments.
Why Companies Use Non-GAAP Measures
Companies have several reasons for including non-GAAP figures in earnings releases.
First, management may believe certain items make it harder to evaluate ongoing operations. Acquisition-related costs or restructuring charges, for example, may be viewed as unusual in a particular period.
Second, non-GAAP measures can provide additional information alongside GAAP results. Analysts and investors may use them when evaluating trends across multiple reporting periods.
Third, management teams sometimes use these measures internally when discussing operating performance.
That does not mean non-GAAP figures should replace GAAP results.
The SEC requires companies that present non-GAAP measures in applicable filings and earnings releases to provide the most directly comparable GAAP measure with equal or greater prominence.
Why the SEC Is Concerned
The SEC’s guidance on Non-GAAP Metrics focuses on how these measures are presented, reconciled, and explained to investors.
A non-GAAP number can potentially give investors a different impression of performance if important adjustments are not clearly explained.
There are three areas that deserve particular attention.
1. GAAP Must Not Be Given Less Prominence
One of the clearest requirements concerns presentation.
When a company presents a non-GAAP measure, the most directly comparable GAAP measure must receive equal or greater prominence.
The SEC’s guidance gives several examples of potentially problematic presentation, including putting a non-GAAP figure before its GAAP counterpart in an earnings release headline, using larger or more prominent formatting, or discussing the non-GAAP result without comparable discussion of the GAAP measure.
The principle is straightforward: investors should not have to search for the standardized number.
2. Adjustments Need to Be Defensible
Another issue is the nature of the adjustments.
The SEC has specifically warned that excluding normal, recurring cash operating expenses can result in a non-GAAP measure that is misleading, depending on the circumstances.
That does not mean a particular expense can never be excluded.
Companies need to consider the nature of the expense, how it relates to their operations, and whether removing it produces a misleading picture of performance.
The question becomes more complicated when an expense described as unusual appears repeatedly.
If an adjustment occurs every quarter, investors may reasonably ask whether it is really unusual or simply part of the cost of running the business.
3. Reconciliation Matters
Companies generally need to show how a non-GAAP measure relates to the most directly comparable GAAP measure.
For investors, the reconciliation is often one of the most useful sections of an earnings release.
It shows what management has added back or removed.
The SEC’s guidance requires quantitative reconciliation in applicable circumstances and says the reconciliation should provide enough detail for readers to understand the nature of the adjustments.
The Balance Between Context and Comparability
This creates an ongoing tension.
From management’s perspective, GAAP results may not always capture every aspect of how the business is being evaluated internally.
From an investor’s perspective, standardized GAAP results make comparisons between companies easier.
Consider two technology companies that report different levels of adjusted earnings.
One may exclude stock-based compensation, while another may include it. A third company may make additional adjustments for restructuring or acquisition costs.
The numbers may all be labeled “adjusted,” but they are not necessarily calculated the same way.
That is why investors should treat non-GAAP figures as additional information rather than automatically assuming that adjusted earnings are a better measure of performance.
What Investors Should Look For
Investors reviewing Non-GAAP Metrics should compare them with the company’s GAAP results and examine the reconciliation.
Look at the GAAP number first
Start with the standardized result before reviewing management’s adjustments.
This provides the baseline for understanding the company’s reported performance.
Read the reconciliation
The reconciliation shows which expenses or gains have been removed.
Pay attention to large adjustments and whether similar items appear repeatedly.
Look for recurring adjustments
A charge described as unusual may deserve more scrutiny if it appears quarter after quarter.
Recurring adjustments do not automatically make a non-GAAP measure improper, but they can provide useful context when evaluating how management defines underlying performance.
Compare the two measures over time
The gap between GAAP and non-GAAP earnings can be informative.
If the difference is relatively small and stable, the adjustment may have limited impact on the overall picture.
If the difference becomes consistently large, investors may want to understand why.
What This Means for CFOs and Investor Relations Teams
For companies, the practical lesson is not to avoid non-GAAP reporting.
Instead, the focus should be on consistency, transparency, and clear explanations.
Companies should identify the most directly comparable GAAP measures, explain significant adjustments, provide required reconciliations, and avoid presenting non-GAAP figures more prominently than GAAP results.
The SEC’s Financial Reporting Manual identifies Regulation G, Item 10(e) of Regulation S-K, and related Compliance and Disclosure Interpretations as key sources of guidance for non-GAAP financial measures.
Read more: Rolling Forecasts vs. Annual Budgets: The Benefits of Both
The Bottom Line
Non-GAAP metrics are an established part of corporate earnings reporting.
They can provide useful context when companies clearly explain how the numbers are calculated and why the adjustments are relevant.
But flexibility comes with responsibility.
The SEC’s guidance makes clear that non-GAAP measures should not obscure the comparable GAAP results or create a misleading picture of financial performance.
For investors, the best approach is simple: read both numbers, examine the reconciliation, and pay attention to the adjustments.
For CFOs and investor relations teams, the lesson is equally straightforward.
Non-GAAP can add context, but transparency has to come first.
Sources
SEC – Non-GAAP Financial Measures: Compliance & Disclosure interpretations
SEC – Financial Reporting Manual, Topic 8: Non-GAAP Measures