And Now, Fake Earnings

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413 x 239.pages copyWith earnings season here once again, and the term fake news ricocheting across social and traditional media, it’s not too great a leap to get to the concept of fake earnings.

Lots of companies present earnings that aren’t really earnings.  For example, in January Intel reported earnings of $10.3 billion, and then adjusted earnings of $13.2 billion, about 30% higher . . . At Google, net income was $4.9 billion but adjusted net income was $6.0 billion or 23% higher . . . Drug maker Celgene reported net income of $2 billion, but also presented investors with adjusted net income of $4.8 billion, 140% higher.

It’s not fraudulent to do this.  Rather, companies are simply reporting in Non-GAAP financial measures.  GAAP stands for Generally Accepted Accounting Principles.  As such, using Non GAAP financial measures is akin to drawing outside the lines, but with the noble purpose of making things clearer to investors in a way that’s not possible by staying within the lines of accepted accounting principals.

If this all sounds fishy, it is.  Without question, there are many legitimate instances where removing certain expenses — say large, one time non cash expenses — can give investors a better view of economic reality.  But the volume and aggressiveness of Non GAAP financial reporting is increasingly making regulators nervous.  During this earnings season keep your eyes peeled for non-GAAP earnings figures and their magnitude relative to GAAP earnings, and you’ll see why.

And if you’re in an everything-you-always-wanted-to-know-about-non-GAAP-earnings mood, check out Investor Uses, Expectations, and Concerns on Non-GAAP Financial Measures by my friends at the CFA institute.  It’s a large work, but an important one if you want to get a handle on the differences between real and fake earnings.