The simple answer is yes. I can and do ignore them completely.

Before I get to the long answer I want to first say I don’t use EBITDA – otherwise known as bullshit earnings to most value investors 🙂 – LFCF, PE, or EPS in anything I do or evaluate.

I replace those things with EBIT, FCF, OE, and EV/EBIT, EV/FCF, and EV/OE – owners earnings – respectively.

Negative EPS for long periods of time is not great of course. But if the company is showing signs of turning a “profit” – net income in this case – soon then these negative net income years can be used to offset future years gains when they’re turned into NOL’s – net operating losses or net operating loss carryforwards.

I pay attention to things like EBIT, FCF, and OE more than net income because net income is much easier to manipulate than those three.

You can literally make the net income whatever you want depending on what you write off for taxes due to things like depreciation.

And in terms of P/E, again, I don’t care about, or even pay attention to that number at all when doing analysis.

The only exception to this rule is when I’m comparing P/E to something like EV/OE, TEV/EBIT, TEV/FCF, etc to show how much better those are than P/E.

Let me give you a short example of how little I care about P/E.

I know the companies I evaluate intimately, only recommended three companies last year, and only own 11 companies currently – which is a high number for me as I’m usually in the 5 – 8 range.

I sometimes will research one company for several months before deciding to buy them. Always spend more than 100 hours researching companies before I buy. And I try to know everything I can about the companies I buy.

But if you were to come up to me and ask me what the P/E is for a company I own I wouldn’t have any idea what it was. And I couldn’t even give you a good guess at the range of its P/E.

Hope this helps and thanks for the question.

I agree, cash is the best metric to use but it too can be manipulated. Even though it’s harder to do so.

This is why when evaluating companies I don’t rely on just one metric – even FCF.

I look at EBIT, FCF, and owner’s earnings to get an idea of the companies “true” earnings.

I then compare these numbers to a companies EV or TEV as talked about above.

Doing this and using these metrics together are all far better than using EBITDA – bullshit earnings, adjusted EBITDA – adjusted bullshit earnings, and the useless P/E.

But again, I never rely on only just one metric or set of metrics. This is only part of the analysis I do to figure out if a company is being truthful or not.

The best area to figure this out is to read the footnotes in the companies 10K’s to figure out how they recognize things like sales and inventory.

Revenue in an income statement is based on an accruals basis. – And so, it is subject to manipulation.

That means your income (or revenue) includes receivables. – Money you’ll get after the reporting period. – Or maybe not, due to bad debts, that is people who will not pay for the product/service sold by the company, or fraud by the company, that is by boosting their sales – usually at the year end and then claim sale returns after reporting of the financial statements.

Same thing applies for the cost of goods sold (COGS) and operating expenses.

So it’s better to get your “operating earnings” from the cash flow statement – specifically from the “Cash from operations” just before the “Net cash from operating activities”, (which is after interest and corporation tax.)

I believe it would be the more conservative approach as profit is an opinion, cash is a fact.