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Simple English definitions for legal terms
pro forma earnings
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A quick definition of pro forma earnings:
Pro forma earnings are a way of calculating a company's income that doesn't follow the usual rules. It includes some income and leaves out some expenses, which can make the company look better than it really is. This is not a reliable way to measure a company's success. Other types of earnings include gross earnings (income before expenses), net earnings (income after expenses), and retained earnings (income that the company keeps instead of paying out as dividends).A more thorough explanation:
Definition: Pro forma earnings are a type of business income that is calculated by including certain income items and excluding various business expenses. This calculation is done in violation of generally accepted accounting principles and is often used to artificially inflate a company's price-earnings ratio.
Examples:
- Operating earnings: This is a type of pro forma earnings that is calculated by excluding certain expenses, such as interest and taxes, from a company's income statement. This can make a company's earnings look better than they actually are.
- Pretax earnings: This is another type of pro forma earnings that is calculated by subtracting income taxes from a company's net earnings. This can make a company's earnings look higher than they actually are.
These examples illustrate how pro forma earnings can be used to manipulate a company's financial statements and make its earnings look better than they actually are. This can be misleading to investors and can lead to inflated stock prices.