Fantasy Math Is Helping Companies Spin Losses into Profits

Re:Fantasy Math Is Helping Companies Spin Losses into Profits by cortesoft on Monday April 25, 2016 @04:51PM (#11567252)

My confusion is why would investors fall for this? I understand why a company would put out these massaged numbers, but why would an investor use that to make their investment decisions? It sounds like the companies are putting out both GAAP numbers and their own numbers... why would an investor not just look at the GAAP numbers? It would seem in their financial best interest to not fall for the ploy.

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Re:Fantasy Math Is Helping Companies Spin Losses into Profits by dharmon on Monday April 25, 2016 @05:04PM (#11567346)

Like most dangerous situations, they begin with a nugget of truth. In this case, GAAP has many limitations / shortcomings, and has been patched up piecemeal over the decades, leading to some oddities.

Tech companies in particular are annoyed by accounting methods developed for completely different types of businesses and are often frustrated that net earnings, for example, doesn't accurately reflect their situation.

However, combine that nugget with investor's willingness to be swooned by the latest growth company, and said company's desire to hit wall street growth targets and you get a dangerous combination.

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Re:Fantasy Math Is Helping Companies Spin Losses into Profits by dforrestwilson on Monday April 25, 2016 @05:05PM (#11567353)

Partly this has to do with investor mindset. If you are thinking about investing in a company which matters more? The earnings they just reported or the earnings they will report in the future once you buy the stock?

The whole basis for normalizing earnings is to get to the real economic numbers you can expect a company to generate in the future. That means taking out what you believe are one-time costs, but again if you keep seeing the same adjustments every quarter, then something is up.

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Re:Fantasy Math Is Helping Companies Spin Losses into Profits by Lazare on Monday April 25, 2016 @05:19PM (#11567447)

It's a legitimate question, but keep in mind: There's no real evidence that investors are "falling for this", in any meaningful sense.

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Re:Fantasy Math Is Helping Companies Spin Losses into Profits by bko on Monday April 25, 2016 @05:19PM (#11567452)

They wouldn't. Pretty much all of financial analysis is about taking the numbers provided and making adjustments based on your projections (e.g. perhaps the large expenditure this quarter wasn't just a one time cost) and other adjustments to make the numbers comparable to those of other firms.

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