When "Pro Forma" Is Bad Forma

If you read many financial statements, you'll likely run across the term "pro forma." It's a bit problematic. It used to reflect some somewhat helpful calculations, but it's now commonly used in a much less helpful manner.

The better usage this is: Pro forma numbers on a financial statement mean that you're looking at what-if numbers. Imagine that Joanie Inc. merges with Chachi Co. in April. At the end of the year, you might see some pro forma financial statements in JoanieChachi's annual report. These would show you the financial state of the firm as if it had been a combined company all year long.

In this case, pro forma results are useful. If you were researching JoanieChachi Inc., you'd want to be able to compare apples to apples. It wouldn't be too insightful to contrast one period's results, pre-merger, with post-merger results. By examining combined results, you can get a clearer idea of the company's financial health.

Here's the worse usage of the term "pro forma": Companies have increasingly been offering investors "pro forma" numbers, which are really just numbers that have had undesirable things taken out. They're gussied-up numbers that companies would prefer you focus on instead of less attractive numbers that are often more accurate representations of the companies' health or performance. These firms will often exclude in their pro forma numbers expenses related to acquisitions and charges taken for bad business decisions, etc. So from now on, when you see the term "pro forma," take off your rose-colored glasses.

Learn more in this article by Bill Mann that details the problems with pro forma accounting.

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