The (Profit) Buck Starts Here

Yesterday, I wrote about how companies are measuring customer satisfaction. This is an example of the variety of useful information that investors might find helpful that are not required to be collected and disclosed today. Another example is new metrics that quantify the success of a company’s development of technology (research and development and all that goes with them). And so on.

Which gets me back to my discussion about a week ago of the goal of financial disclosure, which is to help investors value stocks and bonds. These newer metrics are not measured in dollars. There is no precise way to use this information in valuing a company. (As compared to, say, accounting earnings; which can be converted into a value of a company just by multiplying by them by an average of the price-earnings ratios of similar companies.)

Nothing below. Don’t look….

But to reject the disclosure of this information because folk don’t know how to use it is not right. People got comfortable with price-earnings ratio analysis only after there was a wealth of public earnings information over a number of years that could be analyzed and valuation models tested. The accountants have rejected these new metrics out of hand because they are not founded in accounting records, and the accountants thus far have had a monopoly on the numbers side of securities disclosure. That does not mean that it makes sense for that monopoly to continue, particularly when, as in the tech bubble, the monopoly works to undermine our public capital markets. New dollar-based, non-accounting measures of components of business value must be developed. Collection and public disclosure are a necessary first step.

Tomorrow: Can accounting be simplified?

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