This report summarizes our series of reports on how to protect your portfolio from blow-ups. We detail all the red flags and hidden items buried in SEC disclosures that we fix to derive economic earnings.

Reported earnings don’t tell the whole story of a company’s profits. They are based on accounting rules originally designed for debt investors, not equity investors, and are often manipulated by companies to manage earnings. As a former accountant and current member of FASB’s Investor Advisory Committee, I know first hand the challenges investors face when trying to get the truth about earnings.

Everyone wants the truth. The problem is that getting the truth has become too difficult as next to no one has time to read 200+ SEC filings and go through all the disclosures and do proper diligence.

We provide this diligence with 100% transparency and deliver via an easy-to-use website.

Each of the following reports explains each adjustment we make across the 3,000+ companies we cover.

A)    Income Statement Adjustments to derive NOPAT: to convert reported GAAP income to net operating profit after tax (NOPAT):

  1. Remove asset write-downs hidden in operating expenses
  2. Remove non-operating expenses hidden in operating earnings. This includes foreign currency exchange losses hidden in operating earnings.
  3. Remove non-operating income hidden in operating earnings
  4. Add back amortization of prior pension service costs hidden in non-operating items
  5. Add back change in reserves
  6. Remove income and loss from discontinued operations (except for REITs)
  7. Add back implied interest for the present value of operating leases
  8. Adjust for non-operating tax expenses
  9. Historical adjustments: Add back goodwill amortization prior to 2002 and include employee stock option expense prior to 2006
  10. Remove reported non-operating items
  11. Remove foreign exchange losses & gains

B)    Balance Sheet Adjustments To Derive Invested Capital: to convert reported assets to invested capital:

  1. Add back off-balance sheet reserves
  2. Add back off-balance sheet debt due to operating leases
  3. Remove discontinued operations
  4. Remove accumulated Other Comprehensive Income
  5. Add back asset write-downs
  6. Remove deferred compensation assets and liabilities
  7. Remove deferred tax assets and liabilities
  8. Remove over-funded pensions
  9. Remove excess cash
  10. Prior to 2002: Add back unrecorded and accumulated goodwill
  11. Adjust for midyear acquisitions
  12. Remove non-operating unconsolidated subsidiaries

C)    Valuation Adjustments for our Discounted Cash Flow ModelEconomic Book Value, and Enterprise Value calculations:

  1. Employee stock option liabilities
  2. Preferred stock
  3. Minority interests
  4. Adjusted total debt (including off-balance sheet debt)
  5. Pension net funded status
  6. Net deferred tax assets or liabilities
  7. Net deferred compensation assets or liabilities
  8. Discontinued operations
  9. Excess cash
  10. Unconsolidated Subsidiaries

We’ve performed unrivaled due diligence on over 70,000 annual reports over the past decade. This diligence enables us to provide unrivaled earnings quality and valuation research.

Photo credit: Alexander Baxevanis (Flickr)

    4 replies to "30+ Accounting Adjustments to Get the Truth About Earnings & Valuation"

    • varadha

      Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

      Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

    • David

      But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

    • David Trainer


      That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

    • Ronald Aumueller

      Very good reminders to uncover miss leading data.

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