Why Earnings Quality Matters
Several news outlets have talked about the deterioration in the quality of corporate earnings. Most companies report on both a GAAP and Non-GAAP basis. We are seeing many companies (especially technology companies) pay more of their workers in the form of stock compensation, which can enhance reported (Non-GAAP) earnings. The value of a company can be dramatically different between using GAAP earnings and Non-GAAP earnings when measured from a price/earnings ratio standpoint.