Great question, but it is not easily answered, because pro forma earnings figures are inherently different for different companies. There are no universal guidelines that companies must follow when reporting pro forma earnings, which is why the distinction between pro forma and earnings reported using Generally Accepted Accounting Principles (GAAP) is very, very important.

GAAP enforces strict guidelines that companies must follow when reporting earnings, but pro forma figures are better thought of as "hypothetical", computed according to the estimated relevance of certain events/conditions experienced by the company. Basically, companies use their own discretion in calculating pro forma earnings, including or excluding items depending on what they feel accurately represents the company's true performance.



The smart investor has to be very cognizant of a company's intentions when calculating or releasing pro forma earnings. Companies can use pro forma figures as a means of lessening the blow if actual GAAP earnings are below estimates. For this reason, investors must examine not only the pro forma earnings, but also the GAAP earnings. And never mistake pro forma for GAAP! Although a company reporting pro forma earnings is not doing anything fraudulent or dishonest (because it does report exactly what is and what is not included), it is very important for investors to know and evaluate what went into the company's pro forma calculation, as well as to compare the pro forma figure to the GAAP figure. Often, companies can have a positive pro forma earnings figure while having a negative GAAP earnings figure. When analyzing any company, it's up to the investor to decide which figure is a better indication of performance.


(For more information on earnings and pro forma calculations, check out these articles: Types of EPS and The Tricks and Treats of Pro Forma Earnings.)


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