Can profit tracking be useful for investors?


Can profit tracking be useful for investors?

From the point of view of Unique Fintech Inc analysts, the main goal of economic entities is to maximize profit. But considering "profit maximization" as the company's goal has the following drawbacks:

 Short-sightedness of managers: sometimes managers increase the company's short-term efficiency at the expense of the company's long-term efficiency by citing the goal of maximizing profit and putting it in the hands of the company, which is called "short-sightedness" in the behavioral sciences of management. It is called "management view" and it is considered as an act that reduces the value of the company.

 Over-investment: depending on the performance of managers to maximize profits, may lead to the occurrence of a phenomenon called "over-investment". In this case, while the managers do not have access to suitable investment opportunities, they are not willing to distribute cash profits and transfer resources to the owners for investment by them, thus creating an opportunity cost for the owners and value They reduce their target. In such a case, costs will be imposed on the shareholders, which are referred to as "agency costs" in the texts.

 Accounting discretion and procedures: One of the basic issues in determining accounting profit is the use of subjective methods in determining income and expenses. Although in practice, based on accounting standards, procedures have been determined and required to determine the profit components of accounting profit, but still some items, especially accrual profit items, are subject to discretion, which may disturb the reliability of profit. Such an option leads to the emergence of phenomena such as profit management (adjustment of profit by changing optional accounting procedures with the aim of achieving the desired final profit) and profit smoothing (attempting to smooth the process of profit changes between different years, With the belief that investors like stability and avoid high fluctuations), it has been decided that the quality of profit (probability of realizing profit, which is measured based on the compatibility of profit with cash flows) ) are effective.

 Consensus: There is no complete consensus regarding the definition of profit and its concepts, and from different perspectives, different definitions for profit can be presented. In other words, profit is a subjective and abstract concept that can be defined and calculated in different ways depending on the desired goal and situation.

 Valuation problem: The use of book values based on the historical cost (based on the reliability feature) is always one of the problems that has disturbed the accounting valuations. Especially with the existence of inflation, the accounting measurements of profit as a measure of the business unit's performance will not be relevant and will disturb the decision making. Therefore, not considering the time value of money and in other words, fair values, is considered one of the basic problems of profit as a measure of value creation. The main issue here is that for many assets there is no determinable objective current value. In dealing with relevant but subjective current values and irrelevant but objective historical values, accountants choose the irrelevant historical price. In fact, accountants would rather be completely wrong than vaguely right.

 Inclusion of profit: profit does not take into account the quality and risk related to the operation and activity of the business unit according to the accounting standards related to its measurement. In addition, by adopting a proprietary approach, accounting profit does not include the interests and criteria of other interest groups of organizations and does not include other goals of commercial units, including social goals. It should also be noted that the benefit is retrospective.