When making those predictions, it can be reasonable and make sense to adjust the reported profit figure so that it better foretells the future. But that’s where the trouble begins.
Slippery slope alert here.
Indeed, while you’re at it, ignore all the expenses that aren’t reflective of what you earn from your regular operations. And why not also ignore those expenses that don’t immediately require cash to be paid. Hey, why not also ignore expenses that differ between parts of your business, like rent-in-New-York versus rent-in-Little-Rock.
These practices give so-called adjusted earnings figures, such as EBITDA, EBITDAR, EBITDAO, EBITDAX. Thesare are acronyms for...oh, never mind. Some other time.
Before you know it, you’ve got what famous investor Charlie Munger called “bullshit earnings”.
Don’t get us wrong… there’s a time and a place and a good argument for judicious use of reported-profit adjustments. But there’s also that business of too-much-of-a-good-thing.
Sending eyes-wide-open regards,