Improving the Usefulness of Financial Statements
- The shift from tangible to intangible investments has complicated the ability to interpret financial statements.
- One solution is to record intangible investments on the balance sheet and then amortize them over their useful lives.
- We apply this approach to two companies in different industries and the S&P 500 index.
- This results in a huge operating profit margin expansion for the company that is intangible intensive and an insignificant change for the one that is tangible intensive. We estimate that earnings for the S&P 500 would be about 12 percent higher.
- This analysis suggests that one should compare earnings or valuation multiples over time with great caution.