With earnings babble, take a healthy dose of skepticism

The Leckey File

Your Money

October 17, 2004

Take a walk on the sunny side of the street: Read a company quarterly earnings announcement.

Chief executive officers of companies with terrific quarterly earnings graciously offer themselves as upbeat interview subjects for newspapers, broadcasts and Web sites. Those with poor earnings or losses unfortunately are far away on vacation or a business trip and unavailable for comment.

Watch out for the term "pro forma," a way of distorting reality by pointing out how great things would have been if a certain incident such as a merger hadn't taken place or other circumstances were more hunky-dory. Pay attention only to actual figures presented according to generally accepted accounting principles.

Last month there were many advance warnings from firms about coming third-quarter earnings, with reasons ranging from cosmic effects of the economy to the fact that government regulators were busily leafing through the company's books with raised eyebrows.

Because it was difficult in the past quarter to match the robust earnings of earlier quarters, some announcements may try to divert your attention by playing up less-pertinent information, such as the success of a single product. Don't be sidetracked.

Even though companies can manipulate earnings numbers, they are important. Firms must generate enough cash to pay bills, reward shareholders and plan for the future.

The earnings announcement process is ruled by the fear of not meeting the expectations of Wall Street analysts and the stock market. Improperly presented announcements could also send a stock price skidding.

In reality, the long-term potential of a company and its stock is more important to you as an investor than all of this quarterly intrigue. Sit back, relax and don't believe all the happy talk or excuses from the nation's companies this month.

- Andrew Leckey Tribune Media Services

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