When businesses share their financial results, they usually include numbers based on official accounting rules known as GAAP (Generally Accepted Accounting Principles). But you might also notice companies reporting additional numbers, like “adjusted earnings” or “pro forma income.” These are called non-GAAP financial measures.

So what are they? And why do businesses use them?

Let’s break it down.

What Are Non-GAAP Financial Measures?

Non-GAAP financial measures are alternative ways that companies present their financial performance. These numbers don’t follow the strict rules set by GAAP. Instead, they are adjusted by the company to show what they believe gives a clearer picture of their financial health.

For example, a company might report:

• Adjusted net income (which removes one-time expenses)
• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
• Free cash flow (which focuses on cash available after operating costs and investments)

These numbers are meant to help investors and stakeholders understand the “core” performance of the business, without certain one-time costs or unusual events getting in the way.

Why Do Companies Use Non-GAAP Measures?

There are several reasons companies present non-GAAP figures alongside their official reports:

✅ To highlight ongoing business performance
Companies might adjust their results to exclude large, one-time events (like a legal settlement or restructuring costs) so people can see how the regular business is doing.

✅ To compare better with peers
In some industries, certain non-GAAP metrics are common. Using them can help compare results across similar companies.

✅ To tell their story
Non-GAAP numbers allow companies to give more context and help explain how they’re performing according to their own business strategy.

What Are the Risks of Using Non-GAAP Measures?

While non-GAAP numbers can be helpful, they can also be misleading if not used carefully.

⚠️ Lack of standardization – Different companies may calculate the same metric in different ways, making it hard to compare.
⚠️ Cherry-picking – Some companies might remove only negative items to make their results look better.
⚠️ Confusion – If readers don’t understand the adjustments made, they may misinterpret the company’s financial health.

That’s why regulators (like the U.S. SEC) require companies to clearly explain how non-GAAP measures are calculated and to always show the GAAP figures side by side.

What Should Businesses Keep in Mind?

If you’re a business thinking about using non-GAAP measures in your reporting or communication, here are a few tips:

🔹 Be Transparent – Always explain what adjustments were made and why.
🔹 Use Consistently – Don’t change the way you calculate a measure each quarter.
🔹 Avoid Overuse – Non-GAAP measures should support your financial story, not replace official results.
🔹 Provide Context – Help your audience understand how these numbers reflect business performance.

Final Thoughts

Non-GAAP financial measures can be a valuable tool for businesses to give a clearer picture of their operations and long-term strategy. But they must be used responsibly, with transparency and consistency.

For businesses, understanding how to present these numbers—and how they might be interpreted—is key to building trust with investors, partners, and stakeholders.