OK I Get it, Corporate Earnings are a Fairy Tale and Reality is Crummy, But Do They Have to Push it This Far?

Saturday, May 21, 2016
By Paul Martin

by Wolf Richter
WolfStreet.com
May 21, 2016

All 30 companies in the Dow Jones Industrial Average have now reported earnings for the first quarter. As required, all of them reported these earnings under GAAP, the thicket of Generally Accepted Accounting Principles that is supposed to help investors get some insights into the financial condition of the company.

But 19 of these 30 companies also reported “adjusted” earnings that they skillfully draped over their GAAP earnings, and now it all looks just so much prettier.

GAAP gives companies a lot of leeway to beautify their results. But in these challenging days of ours, it’s still too hard to make earnings look good enough. So companies, in collaboration with Wall Street analysts and the media, use their own principles that they make up as needed. And they’re certainly needed.

In Q1, according to FactSet, the companies in the DJIA that “adjusted” their earnings inflated them on average by 28.9% over their earnings under GAAP.

And the inflation in “adjusted” earnings is picking up. Last year, only 16 of the 30 companies in the DJIA resorted to this beautification strategy. And they inflated earnings by only 19.7% on average.

By “adjusting” earnings, the companies purposefully inflate growth of earnings and of earnings per share – crucial metrics that Wall Street bandies about in an attempt to justify sky-high stock prices.

The Rest…HERE

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