FrameworkCase studyAccountingValuationFounders and companies
An adjusted metric is an argument about what should not count
WeWork: Or the Making and Breaking of a $47 Billion Unicorn · 2021
The idea
Every non-GAAP figure is a sentence that begins with 'ignoring'. Sometimes the thing ignored is genuinely one-off and the adjusted number is more useful. Sometimes the thing ignored is the cost of running the business. WeWork's community adjusted EBITDA excluded the costs of opening and marketing the locations the company existed to open, which turned a loss into a profit on paper. The test for any adjustment is the same: would a buyer of the whole company get to ignore this cost? If not, the adjustment is an argument, and you should know who is making it and why.
Judge an adjustment by whether an owner of the whole business would also get to ignore the cost.
When it works
Reading any earnings release, pitch deck or S-1 that leads with a non-GAAP measure.
When it may fail
Adjustments are often honest, and stock-based compensation is a real debate rather than a trick. The habit is to reconcile, not to dismiss.
How to use it
Rebuild the adjusted figure back to GAAP line by line and label each add-back as recurring, one-off or an argument. The size of the third column is what to talk about.
Where it came from
Documentary WeWork: Or the Making and Breaking of a $47 Billion Unicorn · 2021
What the source says. A valuation story from first round to withdrawn IPO, with community adjusted EBITDA as the single best example of an adjusted metric built to flatter.
Connected ideas
Says something similar
Revenue recognition and off-balance-sheet vehicles can book profit that never arrivesProfit is an opinion about the future; cash is a fact. When they diverge for long, find out why.
Puts it to work
Stock-based compensation is an operating expense that costs no cash and dilutes you anywayTreat stock compensation as a cost of doing business; either deduct it from cash flow or count the dilution, and never ignore it twice.
Concepts
Put it to work on L3VLUP
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