Why financial statements do not work for digital companies
A company that makes permanent losses cannot be a particularly successful company. This seems like a sensible statement. But this thesis does not explain why, for example, Facebook acquired WhatsApp for $19 billion even though WhatsApp had no revenues or profits at the time, or why Microsoft paid $26 billion for LinkedIN that had made losses at the time.
Digital businesses have a value that can no longer be reflected in traditional accounting methods.
A study by Havard Business Review shows that the income statement is becoming less and less important for investors. Only 2.4% of the variation in stock returns is explained by the company's earnings. This means that almost 98% of the variation in equity returns is due to various other factors, more important than the annual earnings.
Another aspect that is not covered by classical accounting methods are network effects. For example, the value of a social network grows with a larger number of members.
At the same time, the value of the intangible asset grows and does not wear off, as is the case of tangible asset.
For digital companies new accounting methods have to be developed to make an evaluation of the company possible.
If you are interested in finding out what makes digital businesses so successful and how you can turn your business into a digital one, visit our workshop.