Underlying profit, also known as adjusted profit or core earnings, is a financial concept used to give a truer representation of a company’s true financial performance. Companies calculate underlying profit internally, to show what they believe to be an accurate reading of their operational, or core, profit position.

To arrive at their underlying profit number, some companies focus on the regular accounting cycle events, such as income and expenses. Because accounting methods can sometimes lead to distortions in financial statements due to one-time or rare occurrences, these companies aim to remove these expenses from their overall calculations and gain a more realistic perspective. Some of the items companies exclude from their underlying profit calculations include sale of property, discontinued operations, and extraordinary items. The most common expenses companies adjust their underlying profit for include:

• Non-recurring expenses, such as write-downs on assets for which there were no related revenue gains • Adjustments related to income taxes • Adjustments for interest expenses • Amortization and depreciation, depending on the company

Companies create their own version of an underlying profit calculation, making adjustments to the overall accounting profit as they see fit. Companies may make adjustments to their underlying profit number to factor in factors such as cash flow or revenue, to create an even more precise mirroring of their financial position. Some companies also refer to this number as core earnings, or economic profit.

Underlying profit is an important tool for investors, as it provides a clearer picture of the true performance of a company. It eliminates the distortion which can be caused by one-time or rare events, providing a more accurate reflection of the company’s performance. Analysts can use this number to assess the company’s financial health, as well as make more informed decisions when it comes to investments.

Analyzing a company’s underlying profit can help investors form a clearer understanding of the firm’s true financial position. This number is important for assessing the performance of the business, and ensuring that the investor is getting a true sense of the underlying performance of the business. Analysts can use the underlying profit number to compare companies in the same industry and use a more meaningful financial ratio analysis. This helps to understand the health of any company and make an informed decision when investing.

Overall, underlying profit is an important metric for investors to understand a company’s financial performance. This powerful tool eliminates non-recurring events from their assessments to gain a more accurate picture of how a business is performing. Investors can use this number to make more informed decisions about their investment portfolio and gain insight into a company’s operations.