CandleFocus

Pro Forma

Candlefocus Editor
Pro forma, Latin for “as a matter of form” or “for the sake of form”, is a type of financial reporting intended to present a company’s financial results through a projection of what those results would be if certain assumptions were made. Unlike Generally Accepted Accounting Principles (GAAP) compliant financials, pro forma is non-GAAP compliant and is not necessarily intended to reflect past, current, or future financial position or performance.

There are several types of pro forma financials, including:

• Historical pro forma: This type of pro forma presents financials that include past and present items, but with certain assumptions made to give a more accurate idea of the future.

• Prospective pro forma: This type of pro forma includes only items that the company believes will be true at a certain point in the future. It’s mainly used to provide information to investors when a company is considering going public or to highlight potential areas of growth.

• Adjusted pro forma: This type of pro forma presents financials that are adjusted for non-cash items. It’s used to give investors a truer picture of a company’s health.

Pro forma financials can be used to help management manage the company’s budget and make decisions. They can also be released to the public to give investors a better idea of what to expect from the company, or to bring attention to certain items that could potentially provide added value.

However, as pro forma financials are not subject to GAAP compliance, they may not necessarily be reliable indicators of future performance. It’s illegal for publicly traded companies to mislead investors with overly optimistic estimates of revenue and expenses. Therefore, companies should use the most conservative possible assumptions when creating pro forma financials.

Overall, pro forma financials can be a valuable tool for both investors and management, but it’s important to ensure that the assumptions underlying the pro forma are realistic and used to provide an accurate view of the future of the business.

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