With earnings season in full swing, it's important for valuation-conscious investors to look past the headlines and examine the underlying numbers. Frequently, companies report non-GAAP results that are used to determine whether earnings have met expectations. While it's critical to understand these figures, don't make the mistake of excluding some of the items when you're assessing the valuation of a stock.
One such item to be aware of is excluded charges such as restructuring, especially when these "one-time" charges are actually recurring every year. Take a look at EMC
But restructuring is not the only culprit. Take Johnson & Johnson
Another fun trick is to adjust for what income would have been if we didn't have to expense anything. Rosetta Stone
I have no issue with disclosing one-off transactions and their impact to the bottom line in a given quarter. Just don't exclude them from EPS. To say issuing checks to hundreds of terminated employees or waging a court battle isn't relevant to the company's performance is ridiculous. A P/E ratio looks a lot better when millions of dollars are excluded from expense.
Fool contributor Stephen J. Marini does not own shares in any of the companies mentioned above. Rosetta Stone is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Inside Value and Motley Fool Income Investor selection. The Fool owns shares of EMC, and Johnson & Johnson. Alpha Newsletter Account, LLC owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.