Financial Metrics Shenanigans
Newly minted doctors are required to take the Hippocratic oath and pledge their commitment to practice medicine ethically.
Perhaps corporate managers should be made to study the Hippocratic oath and apply it in earnest when they communicate with investors. In so doing, they would pledge to never knowingly harm investors and always refrain from showcasing metrics that misrepresent performance. That day seems way off in the horizon. Until it arrives, however, investors must be alert to the following three techniques that management can use to obfuscate:
In this article
- Misleading Revenue Surrogates
- Misleading Earnings Surrogates
- Misleading Cash Flow Surrogates
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- Highlighting a misleading metric as a surrogate for revenue;
- Highlighting a misleading metric as a surrogate for earnings; and
- Highlighting a misleading metric as a surrogate for cash flow.
Misleading Revenue Surrogates
Many people consider revenue growth to be an important and straightforward measure of the overall growth of a business. Companies also frequently provide additional data points to supplement revenue, providing investors with more insight into product demand and pricing power. Investors should welcome this additional information and analyze these supplemental non-GAAP (generally accepted accounting principles) revenue metrics to better assess the sustainable business performance. However, sometimes these revenue surrogates provided by management can be misleading and can harm investors if appropriate safeguards have not been put in place.
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