Definition:

Earnings of Discontinued Operations refer to the net income or loss generated by a component of a company that has been disposed of or is classified as held for sale. This figure is reported separately from continuing operations on the income statement to provide clarity on the company's ongoing financial performance.

Formula:

Earnings of Discontinued Operations = Revenue from Discontinued Operations - Expenses from Discontinued Operations - Taxes on Discontinued Operations

How to use the metric:

Investors and analysts use this metric to assess the impact of discontinued operations on a company's overall financial performance. By separating these earnings, stakeholders can better evaluate the profitability and operational efficiency of the company's continuing operations.

Limitations:

One limitation is that it may not provide a complete picture of a company's future performance, as it excludes potential future earnings or losses from the discontinued operations. Additionally, the classification of operations as discontinued can sometimes be subjective, leading to inconsistencies in reporting.

Applies to:

This metric is applicable across various industries, particularly those with frequent divestitures or restructuring activities, such as manufacturing, retail, and technology.

Doesn't apply to:

It may be less relevant for industries where operations are rarely discontinued, such as utilities or certain service sectors, because these industries typically have stable and ongoing operations with fewer divestitures.

Summary:

Earnings of Discontinued Operations provide insight into the financial impact of divested or held-for-sale components of a business, allowing for a clearer analysis of continuing operations. While useful, the metric has limitations in predicting future performance and can be subject to reporting inconsistencies.