Legal Definitions - pro forma earnings

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.