Ask Matt: Are unprofitable companies worthless?

Q: Are unprofitable companies worthless?

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, investors apply measures like the P-E ratio to gauge how expensive the stock is. Sizing up shares of a company that doesn't have earnings is more difficult. The first matter to consider is the standard by which investors determine profitability. Generally accepted accounting principles, GAAP, include all the expenses a company faces, including some that are non-cash, 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 (TSLA), for instance, lost $2.26 a share last year based on GAAP. But taking out one-time and certain non-cash charges, the company was profitable last year by 14 cents a share. The other factor is 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.

Paste BN markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at mkrantz@usatoday.com or on Twitter @mattkrantz.