Non-GAAP Measures
Also known as: Adjusted Metrics, Non-GAAP Earnings
Non-GAAP measures are financial metrics that adjust standard accounting figures to exclude items management considers non-representative, such as adjusted EBITDA or adjusted EPS.
Non-GAAP measures are performance metrics that depart from generally accepted accounting principles by adjusting for items management views as non-recurring or non-operational. Common examples include adjusted EBITDA, adjusted earnings per share, and free cash flow.
Why companies use them
Used well, non-GAAP figures can show the underlying trend of the business by stripping out one-time noise. They often communicate operating reality better than the strict GAAP number.
The scrutiny
Used poorly, they can flatter results by excluding real but inconvenient costs. The SEC requires companies to reconcile non-GAAP measures to the nearest GAAP figure and not to give them undue prominence, and sophisticated investors always check what was adjusted out, much as a buyer scrutinizes EBITDA add-backs in a deal.