What’s surprising, though, is how willing regulators have been to allow the proliferation of phony-baloney financial reports and how keenly investors have embraced them. As a result, major public companies reporting results that are not based on generally accepted accounting principles, or GAAP, has grown from a modest problem into a mammoth one.
I honestly was unaware that these companies could do so, and are the reports/recommendations always based on gaap financials?
Here is the full article.
From my understanding analyst reports/recommendations are based on GAAP numbers as these are considered the "true" values. Non-GAAP reporting is used more as a marketing tool to say "hey I know GAAP says X, but really if you look at it this way our numbers are actually Y" which panders more to the non-financial savvy public.
However, companies will prefix these numbers with phrases like "Non-GAAP earnings" (Tesla is notorious for doing this to look financially stronger - their Non-GAAP revenue is about 40% higher than their GAAP equivalent in 2014!).
That's why it's important as an investor to read the financial statements yourself and become comfortable with certain industries so you know what is acceptable practice and what isn't. You can also take advantage of this as the average investor might look at a company like Tesla and go "wow their top line is growing like crazy!" when GAAP revenues actually show a decline.
Great response, thanks.
Agree completely. Taking the non-GAAP figure that the company is pushing for is normally the most convenient one to use, hence sell-side analysts often revert to using that. Whether it's always the right thing to do is a different story.
Well that's a little concerning that analyst recommendations are based on non-GAAP measures. I'm sure the difference is negligible most times but it definitely gives an opportunity for management manipulation. I can't say I haven't lost a little bit of trust in those analyst reports.
I'll be candid. This is partially why I was so frustrated when studying for the CFA. Memorizing all these specialized GAAP and IFRS rules when, in reality, they do whatever they want and come up with all kinds of reporting measures and justifications.
Honestly, I think this is why so many of these 'common sense' shows, books, etc are taking hold. Getting back to basics is more important than ever. The answer to 'Do you make money' should never be "Well, it depends." You do or don't. I don't care how many tricks, manipulations, caveats you put in there. We have made 'business' so complicated it is absurd.
Love it. Totally agree.
ifrsbox.com is an example of simplicity and the book Creative Cashflow Reporting, Quality of Earnings, Financial Shenaigans, the financial numbers game, Financial statements a step by step guide, BIWs's accounting module in the fundamentals make things easier, for a really detailed look PwC's Accounting Manual and IAS plus
What industries expense capex upfront?
And wouldn't the SaaS firm use the % of completion method which would allow for more revenue to be recognized in a period with higher costs?
You need to understand why GAAP financial statements exist. Financial statements prepared using GAAP are for consistency and comparability. Consistency meaning year over year the statements are prepared the same. Comparability meaning you can reasonably assume that two different companies are both using the same rules and compare their performance.
GAAP F/S can help analysts evaluate the business, but Non-GAAP numbers and management effectiveness reporting are often much more helpful in overall business evaluation.
I think the non-gaap numbers are helpful (i.e. constant currency revenue growth and adjusted EBITDA). Allows you to see what is negatively impacting its figures.
Any who, I primarily deal with credit. I like seeing the cash accounting at times.
On a related topic, for M&A accretion / dilution, we show clients both GAAP and non-GAAP analysis, however, management typically is more concerned about non-GAAP accretion / dilution as most equity investors would focus on that (investors are less interested in non tax-deductible amortization that gets generated from M&A write-ups)
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