Many stock watchers, still reeling from high-profile accounting scandals, are wondering whether new accounting rules mean earnings reports can be trusted.
“Most of the change is coming from the SEC and companies looking to change their images,” says Ron Gruner, president of Maynard, Mass.-based investor-relations service Shareholder.com.
While the goal is a clearer, simpler way of reporting the fiscal health of public companies, there is still no consensus on what earnings thermometer should be used.
“There are two questions facing earnings today,” says Robert Green, a Boston-based analyst with stock market tracker Briefing.com, “What is the proper definition of earnings? And, are earnings all you should
Currently, analysts use three types of earnings results to dissect company performance: as reported, operational and core earnings. Pro forma earnings, popular throughout much of the 1990s, have fallen out of favor.
As-reported earnings — also known as GAAP (generally accepted accounting principles) numbers — are by far the most popular. GAAP includes most costs and sources of income.
Biz Ink reports this number as corporate profit or loss.
“GAAP is great for accounting purposes — for five-year trends,” Green says. “But I think people are still looking for a number” to judge short-term performance.
Expenses related to discontinued operations and extraordinary items can swing a company from the profit column into the loss column, he says.
“Cash flow is almost as important as earnings — if not more so,” he says. “You can’t lie about cash flow.”