Question
Relying on proforma earnings statements can have several potential risks or drawbacks. Firstly, these statements are not audited, which means they may not accurately represent a company's financial health. Secondly, they often exclude certain costs, such as restructuring or acquisition costs, which can make a company appear more profitable than it actually is. Lastly, because proforma earnings statements are not standardized, it can be difficult to compare them across different companies.
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In his article for Harvard Business Review, Baruch Lev – the Philip Bardes Professor of Accounting and Finance at the Stern School of Business in NYU, talks about proforma as one of the ways in which managers can impart useful information to investors. (For more like this, check out our book summary). Lev stresses that "research shows that proforma earnings statements prominently displayed in the headline or first paragraph of a company's news release have a much stronger impact on stock prices than proforma earnings reported elsewhere in the document."
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