Ben Inker, the director of investment management at GMO, has written a great report on how companies have become very proficient at manipulating their operating earnings. You can read it at in their research section (registration required).

The quick summary is if you are using PEs to compare current market valuations to history, be sure to use PEs based on trailing net earnings (what all the historical numbers are based on). Unfortunately, many PEs reported today are based on operating earnings and sometimes even on forward looking expected earnings which together can make the PE look 30% better than it really is.

Since 1988, companies have made steady progress on improving their operating earnings numbers such that every quarter since 1997 operating earnings for the S&P 500 has been higher than net earnings. Considering that a “fair” operating earnings should be higher than net earnings only around half the time, you can see how adept corporations have become at manipulating their operating earnings since S&P started reporting them in 1988.