Why Warren Buffett IGNORES "Net Income"

Net income frequently fails to reflect a company's underlying performance, often becoming a "worse than useless" metric due to accounting standards and external volatility. A primary driver is the 2018 accounting change requiring companies to report unrealized gains and losses on equity holdings, which caused massive profit swings for Berkshire Hathaway, Shopify, and Amazon regardless of whether they sold their positions. Beyond accounting rules, management can legally manipulate earnings through aggressive revenue recognition or by shifting expense timing to meet bonus targets, as seen in cases like Luckin Coffee and Wirecard. External factors such as currency fluctuations, tax law changes, and tariffs further distort these figures, impacting global giants like Apple and Ford. To gain a clearer picture of true profit generation, investors should prioritize operating earnings, free cash flow, and return on equity. Warren Buffett advocates using net income only as a starting point, suggesting that smoothed-out operating figures provide a more predictable measure of long-term business health.