Investors won’t be fooled by JD.com, Alibaba massaging their financial results

Source:Global Times Published: 2017/8/17 20:58:39

JD.com's impressive quarter was flattered by some financial wizardry. The Chinese online retailer's top line grew by some 44 percent, helping generate $144 million of earnings. Unless, that is, conventional US guidelines for calculating the numbers were applied, in which case it lost $42 million.

JD, whose shares have soared 73 percent this year, has conditioned investors to focus on figures that diverge from generally accepted accounting principles, or GAAP. The significance of these more favorable finances was stark in the latest three-month period to June 30. Some $110 million paid out to employees in stock did not get factored into JD's preferred earnings measure, thus magically helping turn red ink into black.

Among other Chinese companies, Alibaba, Jack Ma's $400 billion e-commerce goliath, similarly shines a spotlight on alternative accounting. Chief Financial Officer Maggie Wu extolled "non-GAAP free cash flow" on the first page of its last earnings press release.

Given all the buying and selling the company does, it could make sense to provide investors, as Alibaba does, with parallel figures that abandon traditional accounting standards. It also, however, carves out the cost of share-based compensation, which in the quarter ended March 30 tallied some $625 million, or 11 percent of revenue.

By contrast, some big US tech firms have weaned themselves from the fiction that millions of shares doled out to employees aren't a routine cost of doing business. Amazon could have presented 75 percent more operating income last year had it backed out $3.1 billion of stock awards. In January, Google parent Alphabet conceded that non-cash payouts were a "real cost" because of their use in recruiting and retaining staff, and therefore it would no longer adjust for the expense. Facebook Chief Financial Officer Dave Wehner said in May the company wants investors to focus on financial performance with stock-based compensation included.

Some of the changes have been the result of pressure from shareholders and regulators. As companies mature, these sums also get more predictable. And it won't hurt US tech heavyweights that simpler accounting might reflect poorly on fast-growing rivals that gloss over such costs with modified figures. When it comes to investor perceptions, Chinese companies, too, may find GAAP causing a bigger divide.

The author is Jeff Goldfarb, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews. bizopinion@globaltimes.com.cn

Posted in: INSIDER'S EYE

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