Buffett: Net Income Worse Than Useless For Evaluating a Business, Focus on Operating Metrics Instead
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Warren Buffett calls net income "worse than useless" for evaluating a business; it can give a false impression. He recommends looking at operating income instead.
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Net income includes unrealized capital gains/losses which don't reflect operations and have little connection to long-term stock price.
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While net income is "worse than useless" on its own, it can still provide insight into a company when used as a starting point along with other metrics.
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Buffett disapproves of metrics like EBITDA which companies use to paint a rosy picture. But they can still add data points to understand a business.
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No single metric tells the whole story. You need to look at all financial statements over time to determine if an investment makes sense.