Pro-Forma EarningsExplained & Defined

Written By:
Adiste Mae

Reviewed By:
FundsNet Staff

What is a Pro-Forma Earning?

Companies computing for their true profitability exclude costs that might misrepresent their report.

Its computation may deviate from the standard GAAP practice, so the result of the Pro-forma earnings may be higher.

Business plan reports and Initial Public Offering (IPO) requires the computation of Pro-Forma Earnings.

Understanding Pro-Forma Earnings

Publicly traded companies that want to give investors an optimistic view of their overall financial health publish Pro-forma earnings in the first sense.

They are usually higher than GAAP earnings but could also be lower.

Items such as restructuring expenditures, obsolete inventory, and asset impairments may not be included in the computation of the Pro-forma earnings because they don’t form part of a company’s regular business operations.

To present a more accurate representation of its profitability, irregular expense items are usually left out.

However, some businesses have a history of abusing this approach by leaving out expense items that should be included.

Therefore, computing the Pro-forma earnings should be used with caution by investors in their fundamental examination.

Pro-forma earnings, in contrast to GAAP results, are not subject to any standards or laws.

As a result, when GAAP criteria are used, the resulting positive earnings used in a Pro-forma scenario may turn out negative when the GAAP standard is complied with.

A company may record a net loss for a quarter when GAAP principles are followed.

But if the loss resulted from one-time expenses such as reorganization or legal costs, the business may present Pro-forma earnings that reflect a profit.