As earnings engineering escalates, are we at risk of a corporate credibility crisis? (
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In his 1Q16 shareholder letter, Warren Buffett issued a stern warning about the proliferation of non-Generally Accepted Accounting Principles (GAAP) metrics in corporate earnings reports: “It has become common for managers to tell their owners to ignore certain expense items that are all too real.” According to FactSet, more than 90% of S&P 500 companies now use non-GAAP numbers, up from 58% 20 years ago. Meanwhile, the difference between GAAP earnings per share (EPS) and non-GAAP EPS has skyrocketed — non-GAAP EPS exceeded GAAP EPS by an average of 25% in 2015, compared with just 6% in 2013.
Used judiciously, non-GAAP numbers — from EBIT and EBITDA to free cash flow and operating income — can provide valuable insight into a company’s present health and future prospects. However, as the practice snowballs, systemic risks become increasingly apparent. More and more, non-GAAP numbers are being cherry-picked to obscure weaknesses and exaggerate strengths. This not only compromises the ability of investors to diagnose winners and losers, but threatens to distort the U.S. equity market as a whole.
Two Sides of the Same Coin - by Frank Martin (
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Our Low Risk (Low Volatility) World - by Rick Bookstaber (
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FT Alphachat podcast: A sit down with Adair Turner (
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From earlier this year... Josh Waitzkin on The Progression Project podcast (
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Related previous post: Josh Waitzkin with Adam Robinson (video)
Exponent Podcast: Episode 130 — The 50,000 Foot View (
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a16z Podcast: Putting AI in Medicine, in Practice (
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The Economist asks: Richard Dawkins (podcast) (
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Today's Audible Daily Deal ($2.95):
Astrophysics for People in a Hurry - by Neil deGrasse Tyson
Book of the day (author mentioned by Susan Cain in her excellent
chat with Shane Parrish):
Me, Myself, and Us: The Science of Personality and the Art of Well-Being - by Brian Little
