Non-GAAP

Alternative financial measures that exclude one-time or non-cash expenses to show core operational performance.

Non-GAAP financial measures are alternative reporting metrics that do not conform to Generally Accepted Accounting Principles (GAAP). Public companies use these customized metrics alongside their standard financial statements to present what they believe is a clearer picture of their core, ongoing operating performance. This is typically done by stripping out expenses or gains that are considered unusual, non-cash, or non-recurring. To calculate non-GAAP figures, management starts with a standard GAAP metric—such as net income or operating income—and adds back or subtracts specific line items. Common adjustments include removing stock-based compensation, amortization of intangible assets, restructuring charges, and one-time legal settlements. Because there is no regulatory standard for what can be excluded, these calculations are highly customized by each company. Investors analyze non-GAAP metrics to evaluate the underlying profitability of a business without the noise of temporary accounting adjustments or non-cash expenses. However, because management has wide discretion over these adjustments, non-GAAP figures can easily paint an overly optimistic picture of financial health. It is critical for investors to review the mandatory reconciliation tables provided in company filings to understand exactly which expenses are being ignored.

Company A reports a GAAP net income of $50,000,000. To present its non-GAAP net income, management adds back $12,000,000 in stock-based compensation, $5,000,000 in acquisition-related expenses, and subtracts a one-time tax benefit of $2,000,000. The calculation is: $50,000,000 (GAAP Net Income) + $12,000,000 + $5,000,000 - $2,000,000 = $65,000,000 Non-GAAP Net Income.