Jeff Heilman

Going by the numbers alone can be misleading, meaningless or downright hazardous -there are banana skins galore in financial statements “tidied up” for earnings season. One-time charges, for instance, while properly used to take nonrecurring expenses that do not materially affect company value off the balance sheet, can hide unfavorable expenses, bad debt or poor investments. Easy to calculate, the venerable valuation standard P/E ratio-market value per share divided by EPS-reflects the market’s collective opinion regarding the company’s growth prospects. The rub, though, is that accounting-based EPS has more malleability than Play-Doh, and factors such as inflation can bend the truth of the P/E ratio. Then there is private equity’s darling, EBITDA, fine for comparing profitability between companies and industries but blind to all-important operating cash flow and changes in working capital.

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