SunWorks Inc (SUNWQ)

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For doubters,

Valuation not always about making money

Q: Are unprofitable companies worthless?

Matt Krantz

[e-mail] USA TODAY

A: Companies are in the business of making money for shareholders. But if a company isn’t making money, it can still have value. The tough part is figuring out how much.

When a company makes money, measures like the P-E ratio can gauge how expensive the stock is. Sizing up shares of a company that doesn’t have earnings is harder.

The first matter to consider is how investors determine profitability. Generally accepted accounting principles, or GAAP, include all the expenses a company faces, including some that are noncash, such as estimates of wear and tear on equipment.

GAAP is valid, but some adjustments can be useful when looking at the fundamental profitability of a company’s core business. Electric car maker Tesla, for instance, lost $2.26 a share last year based on GAAP. But taking out one-time and certain non-cash charges, the company actually made 14 cents a share.

The other factor to consider is that just because a company loses money now, that could change. Tesla is expected to lose money on an adjusted basis and by GAAP this year, but to turn a profit by both measures in 2016.

Tesla could be overvalued, but it’s hard to say it’s worthless.