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"Pro Forma," Explained

By Motley Fool Staff - Updated Nov 15, 2016 at 6:56PM

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This Latin term has some things in common with science fiction.

What does it mean when you read the term "pro forma" on a financial statement?

Well, here's the problem. It used to reflect some rather helpful calculations, but now it's 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 an explanation of the less useful usage of the term "pro forma": Companies have increasingly been offering investors "pro forma" numbers when they really just want to get rid of undesirable things. 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 company's 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.

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To learn more about how to make sense of financial statements, check out our "Crack the Code: Read Financial Statements Like a Pro" how-to guide (also known as an online seminar). Give any of ourhow-to guides a whirl. More than 90% of those who've taken them have consistently given them high marks -- and besides, we offer a satisfaction guarantee, or you get your money back.

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