February 23, 2016

Polaris Rides High: Adjusted Valuations Reveal Economic Reality


  • PII’s Adjusted Return on Assets is 28%, higher than the traditional 20% ROA level reported by most financial databases.
  • This major distortion is caused by PII’s $131mn goodwill, $167mn R&D expenditure, and $17mn operating leases, which lead to a significant distortion of the firm’s economic reality under GAAP.
  • Additionally, the firm’s Adjusted Operating Cash Flow is at $869mn, a far cry from the firm’s as-reported operating cash flows of $440mn.
  • Also of note is the difference between PII’s Adjusted Price-to-Book ratio of 2.9x versus the firm’s traditional P/B of 5.7x.

PII - 2016 02 19

Performance and Valuation Prime™ Chart

Under GAAP, the as-reported financial statements and financial ratios of PII do not reflect economic reality. The traditional ROA computation understates the company’s profitability by incorrectly including certain items. The distortion of both profitability measures and valuation metrics of PII were driven by the inclusion of goodwill ($131mn), which inflates the firm’s assets, and by incorrectly expensing items like R&D ($167mn) and operating leases ($17mn) rather than treating them as part of the company’s investments.

After adjusting for these issues and a host of other GAAP-based miscategorizations, Valens calculates PII’s Adjusted Return on Assets as 28% in 2015. In contrast, most financial databases show a traditional ROA of only 20%. The profitability of PII’s operations is therefore not what traditional metrics suggest.

Click here to read the article in its entirety at Seeking Alpha.