http://finance.yahoo.com/news/stock-bull-market-gaap-pro-for…
The gap between GAAP and adjusted [non-GAAP] EPS is the widest since the crisis
[I]t has become common for managers to tell their owners to ignore certain expense items that are all too real,” Warren Buffett warned
comments anyone?
The gap between GAAP and adjusted [non-GAAP] EPS is the widest since the crisis
[I]t has become common for managers to tell their owners to ignore certain expense items that are all too real,” Warren Buffett warned
comments anyone?
I recall a recent thread about stock based compensation and why it should NOT be included as an expense. Maybe someone with more board savvy can find a link to that. I will say I did not understand it well enough to summarize it. That is one area of the GAAP v non-GAAP case that continues to confound this investor.
As a follower of this board, I use adjusted numbers for consistency throughout my investments. I equate using non-GAAP numbers with trust in management. If you trust management, they use these numbers as a way to analyze the business on an apples-to-apples comparison. They are stripping out one time expenses and accounting anomalies caused by GAAP. See ABMD for an example of this.
This doesn’t mean I blindly follow management. Check AMBA for a recent example of something that just seems fishy to me - a negative tax rate. On the AMBA board, it sounded as if someone was defending the use of this tax rate on a go forward basis as well. I don’t understand that.
I’m sure there are companies out there trying to use non-GAAP info to pull the wool over investor’s eyes. I haven’t invested in a company that has used adjusted numbers as a weapon of that ilk. Hopefully, I’ll avoid that.
Take care,
A.J.
There really is no simple good. As mentioned, it all starts with trust in management since, push come to shove, any financial reporting is only as good as the trust that you can have that it is honest and meaningful numbers. Without that trust, you have no idea, but then you wouldn’t want to invest in such a company anyway.
Once upon a time, GAAP seemed like a good idea since everyone would be following the same rules so the numbers should be the most comparable. But, that only works with the right rules and the current ones, IMHO … and I’m not alone … don’t really result in the best view of how the company is doing, notably around stock based compensation, which can be a big factor with some companies.
Non-GAAP is an opportunity for the company to say “this number is more reflective of the current state of the business”. As such, it is a more meaningful number for assessing how the business is doing … as long as one trusts the management to be making meaningful and honest adjustments to arise at the number. But, as I say, without that trust, you don’t want to invest in the company anyway.