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Actionable news in GE: GENERAL ELECTRIC COMPANY,

Here’s how investors are duped each earnings season

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Fooled again

A year ago, we explained the many ways companies make reading their quarterly earnings reports a miserable task.

We weren’t just whining. We wanted to remind companies that our readers regularly tell us they struggle to understand earnings announcements, and our job is to decode them for investors. Making that difficult isn’t helping anyone.

We noted that some of their tactics — inventing or manipulating numbers, using meaningless jargon, distributing lame executive quotes, and more — can be outright damaging, eroding investor trust and creating skepticism.

We hoped they’d change their ways.

We’re sorry to say that today, as another earnings season draws to a close, things are even worse.

“Companies are definitely less transparent than they used to be,” said Leigh Drogen, founder and chief executive of Estimize, which crowdsources earnings estimates. They are “using accounting schemes that are more specific to … how they want investors to perceive their results.”

Earnings are a crucial quarterly update for investors, as they provide the “best unbiased” view of what’s going on with companies, sectors and the economy, said Karyn Cavanaugh, senior market strategist at Voya Investment Management. “Earnings discount all the noise,” she said.

‘It’s a holographic presentation bubble distorting underlying operational reality. Companies are working all the angles.’

But today, according to FactSet, more than 90% of S&P 500 companies use their own metrics in an attempt to make their numbers look better. Some conceal revenue and other key numbers in hard-to-access tables. And a recent NYSE rule change has led some companies to report very early in the morning and pushed others to join the posse reporting after the closing bell, creating bottlenecks.

While all this has meant more stress for reporters and analysts, it’s also made things harder for everyday investors trying to do due diligence on the companies they own. Experts say more companies seem to be breaking the most fundamental pact they have with their co-owners: to keep them informed of the true state of their business.

“It’s a holographic presentation bubble distorting underlying operational reality,” said analyst Nicholas Heymann at William Blair. “Companies are working all the angles.”

The growing use of non-GAAP metrics — those that don’t comply with U.S. Generally Accepted Accounting Principles — was one major, and growing, headache we saw this earnings season.

Don’t miss: New York Times Co. uses the same accounting techniques the paper critiques

Companies are obliged to present their earnings using GAAP, but are allowed to use non-GAAP measures to supplement the information. Executives typically claim that non-GAAP numbers are a truer picture of their underlying business because they strip out one-time items such as litigation or merger-related charges or the write-down of assets that have lost value.

Under SEC rules, they are obliged to give equal prominence to GAAP and non-GAAP numbers, and must fully explain how they differ.

But companies often use adjustments described in terms that make them sound very similar to GAAP measures, making it difficult for investors to determine a company’s true financial performance; they don’t calculate non-GAAP measures uniformly, creating further confusion; and because non-GAAP numbers are not subject to audit, they are not checked for comparability, consistency, compliance or accountability.

“There isn’t much scrutiny that’s given to those numbers,” said BTIG analyst Brandon Ross. “There’s no government standard.”

The following table illustrates the problem:

Company Financial metric Description
General Motors Co. EPS-diluted-adjusted Net income attributable to common stockholders less certain adjustments as well as certain income tax adjustments
New York Times Co. Adjusted diluted earnings per share from continuing operations Excludes severance, nonoperating retirement costs and the impact of special items
ConocoPhillips Adjusted earnings Removes impact of nonoperational results and special items
Source: General Motors, New York Times, ConocoPhillips news releases

We aren’t the only ones to notice.

“I am particularly troubled by the extent and nature of the adjustments to arrive at alternative financial measures of profitability, as compared to net income, and alternative measures of cash generation, as compared to the measures of liquidity or cash generation,” Securities and...


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