Practical analysis for investment professionals
29 June 2016

Non-GAAP Business Performance Measures: An Investor Perspective

Posted In: Uncategorized

Non-GAAP accounting is a subject near and dear to many investors’ hearts. Two leading thinkers on the intersection of accounting with investment analysis, Jack Ciesielski, CFA, and Mark O’Sullivan, led a discussion on the issue in a recent CFA Institute webinar.

Ciesielski is well known for his service on the Financial Accounting Standards Advisory Council (FASAC), the American Institute of Certified Public Accountants (AICPA)’s Financial Reporting Executive Committee, and his writings for The Analyst’s Accounting Observer. O’Sullivan leads PwC’s corporate reporting and governance team in the United Kingdom.

The Most Common Non-GAAP Measures

Non-GAAP (generally accepted accounting principles) reporting is the use by businesses of unofficial accounting to disclose their performance. Among the well-known non-GAAP metrics are:

  • Adjusted revenue
  • Adjusted net income
  • Adjusted EBITDA
  • EBIT
  • Adjusted EPS
  • Free cash flow
  • Funds from operation (FFO)
  • Same-store sales
  • Average revenue per customer
  • Sales per square foot

Any analyst who has listened to a corporate quarterly or annual earnings call frequently hears these measures. The critical question, of course, is whether they obscure the details of a business’s results or reveal important information about its performance.

Growing Use of Non-GAAP Measures

In the aggregate, for each of the above named measures, their use has grown from 358 S&P 500 companies in 2009 to 448 by 2015. Broken out, the number of firms employing non-GAAP net income grew from 280 to 401; EBITDA from 68 to 119; FFO from 20 to 24; cash flow from 96 to 157; and operating income from 111 to 159. In total, just 31 companies reported GAAP only results in 2015!

FTSE 100 companies have also embraced non-GAAP measures. A total of 39% of firms report adjusted operating profit; 35% adjusted profit before tax; and 11% adjusted EBIT/EBITDA. Furthermore, there are certain custom measures FTSE 100 firms employ, such as, “net rental income,” “replacement cost profit before interest and taxation,” and “earnings on a current cost of supplies basis.” Just 2% of firms use purely GAAP measures. O’Sullivan stated that his team of analysts at PwC find it very difficult to comprehend the actual performance picture of firms using non-GAAP measures. Why? Because many companies’ reconciliations are spread throughout their financial statements, making it difficult to find the necessary information for comprehension — a strong indication that non-GAAP measures do more to obscure than reveal.

Whatever your point of view about the veracity and usefulness of these measures, they have grown more widespread and, therefore, more important to investors. In fact, a survey of the webcast listeners found that 76% of respondents use non-GAAP performance measures in their own analyses either sometimes (50%) or always (26%). Only 9.4% reported never using them. Importantly, 96.5% said that they also use GAAP to analyze and value businesses.

Not surprisingly, the non-GAAP metrics tend to move in only one direction: up. Once again, non-GAAP accounting seems not to improve transparency and understanding, but instead to blur actual performance.

The Effect of Non-GAAP Measures

Perhaps you believe non-GAAP measures are mostly harmless. That may be, but they are significant. For example, data show that GAAP net income (NI) for S&P 500 companies in 2015 was $562.3 billion. By contrast, non-GAAP NI was a whopping $804.2 billion, or $241.9 billion more. In 2009, those same metrics were: GAAP NI of $257.0 billion, and non-GAAP NI of $350.6 billion. This sample includes only companies that reported both figures for the entire sample period of 2009–2015, so these results are not skewed by the growing number of firms in the S&P 500 adopting non-GAAP measures. Calculated on a percentage basis, their increasing prevalence is even more obvious, with GAAP earnings growing 118.9%, and non-GAAP earnings 129.4%.

UK companies differed slightly in the categories with the most adjustments. Specifically, the “other” category received the most adjustments, with just over £20 billion, and “asset impairments” came in a close second at just below £20 billion. In total, adjustments were around £80 billion. Again, the trend was upward rather than downward revisions.

What Is Driving the Adoption of Non-GAAP Measures?

Ciesielski believes that there are several reasons for the growing ubiquity of non-GAAP performance measures. First, many firms respond to changing reporting trends in their industries. So if Company A begins reporting a non-GAAP measure, it becomes increasingly difficult for Company B not to do the same. This is especially true if Company A attracts greater investor attention.

Another reason for the uptick in accounting strays is somewhat surprising in that it is not a function of manipulations designed to increase executive compensation. Instead, the most common adjustments result from mergers and acquisitions and reorganizations. Perhaps when capital becomes more expensive (i.e., interest rates finally rise) a reduction in reorgs will occur, and hence the upward trend in non-GAAP measures will stabilize, too.

Additional Information

For more insight on this and other market integrity issues, Market Integrity Insights by CFA Institute is a great resource. Also, forthcoming from this team is a non-GAAP measures member survey in July 2016, and in the autumn a paper articulating investor perspectives about non-GAAP accounting. Lastly, the webcast included case studies featuring SAP,, and GlaxoSmithKline.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor and the CEO of Active Investment Management (AIM) Consulting. Voss also sub-contracts for the well known firm, Focus Consulting Group. Previously, he was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. Voss holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: [email protected]

7 thoughts on “Non-GAAP Business Performance Measures: An Investor Perspective”

  1. Matimu says:

    I agree with the argument that these measures are very distorted. The GAAP measures will be more consistent as they are governed by standards. On the same note standards are standardised. They always struggle to cater for some industry specific measures. As a result certain industries will have better looking results simply because of the nature of their business.

    Non-GAAP measures become useful if the users are able to calculate them for themselves as this removes the biases of the people responsible for the performance of the companies reporting on the performance. That being said, not all investors are CFAs. But I guess they can afford to get a specialist to analyse financial results for them.

    1. Hello Matimu,

      You have added significant wisdom to the discussion; thank you!

      Yours, in service,


  2. Jamie says:

    Hi Jason, you wrote: just 31 companies reported GAAP only results in 2015. Can you pls point us to where we can find what these 31 companies are? Thanks

    1. Hello Jamie,

      Thank you for taking the time to respond to this article!

      That information came courtesy of Mr. Ciesielski and his firm and was quoted in the webinar that served as the source material for this article. He sells that proprietary information on his website,, but the cost is not inexpensive. I know that my pals at CalcBench recently conducted a very similar analysis, so maybe they will have that data available, too.

      Yours, in service,


  3. Guy Moszkowski CFA says:

    I took the non-GAAP measures member survey recently and realized afterward that I wished I had screen-shot it because it offered such a complete laundry list of issues to watch out for, which I’d like to share with my team. Would it be possible to get a copy of the survey questions?

  4. Wilson says:

    Or may be the use of non-GAAP should only apply on non-profit making organizations.

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