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Chapter 1. Core Earnings Calculations: A... > Examples of Core Earnings Adjustment...

Examples of Core Earnings Adjustments

How difficult is it to calculate your own core earnings adjustments? If you restrict your analysis to the major adjustments, you can get the information you need from the Web sites of listed companies. Following are three examples of core earnings adjustments, all of which came from information found on online annual reports (normally located under the “investor relations” link on each site).

Proctor & Gamble

All of the information needed to make the major adjustments were found on the corporate Web site, http://www.pg.com—including footnotes.

As of the period ending June 30, 2002, the following information was reported on the company's 2002 Annual Report:

From this information, we calculate the following core earnings adjustments for current-year expenses as well as changes in earnings per share and PE ratio:

As reported, the EPS was $3.09 ($4,352 ÷ 1,408 mil). The new EPS is $2.58 ($3,639 ÷ 1,408). This also increases the PE for year-end from 29 to 35.

JPMorgan Chase

All of the information needed to make the major adjustments were found on the corporate Web site, http://www.jpmorganchase.com—including footnotes.

As of the period ending December 31, 2002, the following information was reported on the company's 2002 Annual Report:

From this information, we calculate the following core earnings adjustments for current-year expenses as well as changes in earnings per share and PE ratio:

As reported, the EPS was $0.81 ($1,663 ÷ 2,053 mil). The new EPS is $–.78 ($–1,600 ÷ 2,053). Because this is a loss, the core-earnings-based calculation has no PE.

Bristol-Myers Squibb

All of the information needed to make the major adjustments was found on the corporate Web site, http://www.bristolmyers.com —including footnotes.

As of the period ending December 31, 2002, the following information was reported on the company's 2002 Annual Report:

From this information, we calculate the following core earnings adjustments for current-year expenses as well as changes in earnings per share and PE ratio:

As reported, the EPS was $1.07 ($2,066 ÷ 1,936 mil). The new EPS is $0.77 ($1,490 ÷ 1,936). This also increases the PE for year-end from 25 to 35.

The three examples with core earnings adjustments are summarized in Table 1.2.

Table 1.2. Core Earnings Summary, Three Examples


With these adjustments made, the companies can be compared to one another on the same post-core-earnings basis. Corporate results for each company can also be compared from year to year on the same adjusted basis. One of the chronic problems in fundamental analysis has always been year-to-year comparisons. With one-time charges, profits from discontinued operations, and other nonoperational changes between reporting periods, it may be difficult to develop a reasonable estimation of future growth trends. With core earnings adjustments, the values being studied are isolated to only those items we can expect to recur.

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