Daily Management Review

US Companies: Overlooked Difference in Numbers Accounting


02/25/2016


The last year turned out to be difficult for the largest US companies, and most importantly, the real results of their work are much worse than they say.



Meutia Chaerani / Indradi Soemardjan
Meutia Chaerani / Indradi Soemardjan
FactSet estimates that earnings per share of companies from the S&P 500 index for 2015 increased by 0.4%, what is the lowest growth rate since 2009.

However, these projections are based on the data submitted by the companies themselves (Pro forma), and do not take into account some points, such as restructuring costs and stock-based compensation.

Let’s take a look at the results of the S&P 500 companies, shown with generally accepted accounting principles. Earnings per share indicator fell by 12.7% - the sharpest decline since 2008. Moreover, the results were 25% worse than the forecasts of the companies themselves, and it is also anti-record.

It turns out that even with the relatively sharp fall in the stock market at the beginning of 2016, many stocks still can be too expensive, and therefore, investors do not pay fair money for them. This means that the front is possibly gloomy with further reduction of quotations, unless the actual stock price reaches a fair level.

The most significant difference in income is observed if we compare price/earnings under US GAAP and Pro-forma.

This difference has long been a subject of controversy for companies themselves, regulators and investors, as the companies can easily delete from their reports cost of laying off workers, considering it a one-off factor.

Incidentally, such a big gap in the US GAAP and Pro-Forma, in addition to 2008, was also observed in 2001-2002. Then, after the collapse of the dotcom bubble, companies wrote off billions of dollars.

Companies also often exclude expenses that are usually an integral part of doing business, such as legal costs or acquisition costs. Meanwhile, technology companies are already accustomed to sending profits reports, which exclude value of shares and options to reward employees, although such a bonus package is almost an integral part of the business.

A striking example is Chesapeake Energy. On Wednesday, the company reported that according to US GAAP, the loss amounted to $ 14.9 billion for all of 2015, yet Chesapeake itself stated that various losses amounted to only $ 329 million.

There is nothing surprising in the fact that the power companies have shown the strongest differences between Pro-forma and US GAAP last year,. According to the statements under US GAAP, they lost $ 48 billion for the year in total, while they write in their reports that they received revenues of $ 45 billion.

So, as we can see, financial engineering is booming.

source: wsj.com
 






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