All earnings great, if you know how to report them with the proper context

By DAVID MOON, Moon Capital Management
September 22, 2002

It is almost as if the technology bubble never burst. Two years ago, investors berated themselves for blindly accepting the pabulum distributed by company executives who were eager to focus Wall Street attention on anything other than their earnings and balance sheets. Sadly, many of those companies are back at it. Bragging about things like "pro forma cash flow," "net adjusted adjusted cash" and EBITDA ("earnings before interest, taxes, depreciation and amortization"), companies are once again looking for (or creating) an accounting metric that makes their situation appear favorable - or, at least, less unfavorable.

IPIX or can brag about expecting to post positive EBITDA some day in the future. Real estate investment trusts often tout their FFO (funds from operations) ' a term that has no standard, generally accepted definition. Why shouldn't other companies also use creative accounting to measure their own performance? Here are a few new accounting measures I have created that some companies might consider:

Many companies might consider reporting "Earnings before CEO freebies." This would exclude irrelevant perks like corporate aircraft and free loans. General Electric, which is paying for monthly flowers at the company provided apartment of former CEO Jack Welch, might also consider a variation on this measure, EBFCF, "Earnings before former CEO freebies."

Companies with significant payroll might consider reporting "Earnings before compensation expense." Wait a minute; a bunch of them already do. All they have to do is pay their employees with stock options and the expense never shows on the income statement.

With the demise of Internet stocks and the saturation of Internet access, the Time Warner unit of AOL Time Warner should consider reporting "Earnings before the losses of our parent company." This would allow issuing a positive press release, perhaps buoying the AOL stock price.

In a period of economic contraction, many companies might find it useful to show their investors "Earnings before our business slowdown." (Or, in some industries, 'Earnings before our business sucked.') This number would depict the amount of earnings the company would have reported (or might have reported) had business not slowed.

Retail stores who rely on their seasonal forecast of consumer preferences, often try to report 'Earnings before inventory markdowns.'

Companies such as WorldCom, Enron, Adelphia and others could show a much healthier income statement if they would report "Earnings before government fines and penalties." The accounting profession would have to determine if legal fees incurred on behalf on corporate executives actually serving in a penitentiary would be excludable from this number.

When a company makes a bad acquisition and later is forced to write down the value of certain assets, they might consider reporting "Earnings before charges for stupid acquisitions." Hewlett Packard's acquisition of Compaq would fit into this category.

Any company with limited revenues and exorbitant expenses should consider reporting "Earnings before ALL expenses." This would guarantee a positive earnings report for almost any company.

Even companies with limited expenses need a method to 'spin' their value ' particularly if the business also has limited revenue growth. These businesses might benefit from reporting 'Earnings assuming we sold a bunch more stuff.'

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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