Author Archives: marc.thalheim

I believe the article “Investors, It Pays to Mind the GAAP Gaps” does an ok job in explaining why there is a difference between GAAP numbers and Non-GAAP numbers in terms of operating expenses for income statements for different companies. According to the article, many companies will have higher Non-GAAP numbers than GAAP numbers because many companies will not include one time costs/revenues in their income statements in the Non-GAAP numbers. Of course the reason for doing this is because they want their investors to see what their “normal” operating earnings usually are under normal circumstances. I say the article does an ok job because it doesn’t really say why the Non-GAAP numbers have been higher on average for the past 10 years, even when we weren’t in the recession. It is highly unlikely that more one time costs have occured than one time revenues every single year. I believe it is always higher because companies will try to be as optimistic as possible, especially when things are looking bad. This is evidenced in the article when it states that companies with a larger difference tend to do worse in the long run.

Additionally, the article goes on to discuss how over the past few years, the recession has caused the gap between GAAP and Non-GAAP numbers to increase because due to the recession, more bad events have occurred than good ones. Therefore one time losses have increased and one time gains have decreased. However, according to the second quarter numbers, the difference between GAAP and Non-GAAP decreased significantly. I believe this could be for three reasons: Either the economy is recovering so there is less incentive to inflate numbers, the one time bad events are no longer one time events, but have been continuously recurring, or people are starting to realize that heavily inflated Non-GAAP numbers is actually a sign of weakness. Personally, I think our economy could get a lot worse, but for the time being it has been somewhat stable, which has decreased the number of one time costs and decreased the need for companies to feel like they have to inflate their numbers in order to have a better image. Regardless of why, it is still important to follow both numbers because in general, an analyst may want to leave out extraordinary events when projecting a companies future growth. However, I also believe it’s important to take one time factors into account when making investments because although they are very rare and extremely difficult to predict, they DO occur, and if one is prepared, he/she can make a healthy profit or in some cases, save a lot of money.