Q: Adjusted earnings is a scam! (in my opinion). It blows my mind how much attention people pay to adjusted earnings vs GAAP earnings. Management of any company is probably in the most biased position and has the most incentive to paint a rosy picture. This is why GAAP and IFRS exist...to stop management from being able to go into this fantasy land where they can pretend any expenses/cash outflows they don't like never happened.
One of the adjustments I understand the least is the elimination of stock based compensation from expenses when calculating adjusted earnings. Lets pretend there are 2 identical companies. The only difference is company A pays its CEO in stock, and company B pays its CEO in salary for an equivalent amount. Company A will finish the year with higher earnings, however there will be more shares outstanding. As a result, earnings per share (which is what actually matters to an investor) between both companies will be the same (excluded tax impact). This is why it makes no sense in my view for company A to adjust its earnings higher and show higher adjusted earnings vs the identical company B.
The other point I find comical is that companies claim to adjust earnings for 1 time items...yet there are 1 time items every single quarter.... perhaps these 1 time items are part of running the business then?
The worst example might be excluding the write down of Goodwill. News flash manager...that means you made a mistake and over paid for a business...and now you want to pretend it never happened by excluding the write down from earnings?...
My question is surrounding the history of adjusted earnings. How long has this been around for, and is it possible that these (always higher) adjusted earnings are giving the illusion that companies are less over values then they actually might be?
Thanks,
A concerned CPA....
One of the adjustments I understand the least is the elimination of stock based compensation from expenses when calculating adjusted earnings. Lets pretend there are 2 identical companies. The only difference is company A pays its CEO in stock, and company B pays its CEO in salary for an equivalent amount. Company A will finish the year with higher earnings, however there will be more shares outstanding. As a result, earnings per share (which is what actually matters to an investor) between both companies will be the same (excluded tax impact). This is why it makes no sense in my view for company A to adjust its earnings higher and show higher adjusted earnings vs the identical company B.
The other point I find comical is that companies claim to adjust earnings for 1 time items...yet there are 1 time items every single quarter.... perhaps these 1 time items are part of running the business then?
The worst example might be excluding the write down of Goodwill. News flash manager...that means you made a mistake and over paid for a business...and now you want to pretend it never happened by excluding the write down from earnings?...
My question is surrounding the history of adjusted earnings. How long has this been around for, and is it possible that these (always higher) adjusted earnings are giving the illusion that companies are less over values then they actually might be?
Thanks,
A concerned CPA....