Earnings Shenanigans

[Kerim]

Here's an article from the New York Times providing a high-level look at earnings shenanigans. I know that there are weaknesses with GAAP earnings, but non-GAAP is even more suspect, in my mind. I think I have vented before about how frustrating it can be as a retail investor to get a grip on a company's earnings. It is such an important metric in evaluating the safety and prospects for a company's dividends. Still trying to come to grips with that.

[cannew]

As an individual it extremely difficult to really assess earnings, regardless how much time you review the statements. Dividends & dividend growth tell us that what the company said or presented in the past was probably valid, as they could afford the dividend and growth.

It doesn't project into the future, but it's the best measurement we have.

[TomK]

I guess it is another reason to only buy when you are sure you're getting a good value price. Like you're discussing in your "margin of safety" thread, if you are getting a stock undervalued, you've got a lot more leeway with the unknowables.

[Kerim]

(11-18-2013, 01:33 PM)TomK Wrote: I guess it is another reason to only buy when you are sure you're getting a good value price. Like you're discussing in your "margin of safety" thread, if you are getting a stock undervalued, you've got a lot more leeway with the unknowables.

Well, yeah, but that is really just a chicken and egg problem. Earnings are very central to evaluating whether a stock is fairly priced in the first place. So if you can't get a god handle on earnings, how are you supposed to be confident that the stock is undervalued?

[EricL]

An article on SA also talking about the distortion of earnings touted by some companies.

http://seekingalpha.com/article/1847192-...ing_notify

[TomK]

Great find, Eric -- that article has some really great examples of earnings manipulation. So is the safest practice to only look at GAAP numbers? I know those can have shortcomings as well, but it seems like they are more likely to be accurate, and certainly more likely to be on the conservative side, than non-GAAP.