As the old saw goes, "Too many cooks spoil the broth." Evaluating stocks is a lot like that -- there are nearly as many standards for measuring a company's profits as there are standards for grading an essay exam. And perversely, the more of them you monitor, the less likely you are to fully understand a company's progress. You're more likely to just get lost in the sea (soup?) of conflicting numbers.
Case in point: eCollege
The more common measurement of financial success, earnings according to generally accepted accounting principles (GAAP), told a different tale. Here, eCollege thought it could come up with a penny or two in profits by quarter-end. And again, the company beat its own estimate by instead producing $0.05 in per-share diluted profits for a 67% increase over Q3 2003.
A Fool could get a headache trying to figure out which standard to focus on here: the "adjusted" view that the Street and eCollege are pushing, the GAAP standard that most investors use, or the respective pro forma bastardizations of each. The Foolish (best) thing to do in a situation like this is to refuse to play the corporate-spin, Wall Street-expectations game altogether. To ignore their multitudinous permutations on "earnings" and focus on a single metric of your own choosing. To apply this standard across various investment possibilities so as to ensure you're always comparing apples to Apple
In this regard, I humbly submit the metric of free cash flow (which increased by 335% for eCollege, year-on-year). Certainly there will be times and situations in which free cash flow measures a company's performance less accurately than some other metric -- but FCF has the virtue of being more accurate than GAAP and less susceptible to manipulation than the other methods. In the words of John Maynard Keynes: "It is better to be roughly right than to be precisely wrong."
Fool contributor Rich Smith owns no interest in any of the companies mentioned in this article.
