Did Alliance MMA Overstate Its Operating Margin? | Forbes

In Forbes, Pepperdine Graziadio Associate Professor of Economics Paul Gift, PhD, writes about Alliance MMA overstating operating margins. Dr. Gift notes that Alliance MMA was the first-ever U.S. mixed martial arts (MMA) promotion to go public through an IPO, but that its stock price was plummeting a year later. Dr. Gift looks at details of the company's press releases and gross margins following a class-action lawsuit filed by shareholders, and argues that the sequence of statements indicates misstatements cannot be attributed to error. Dr. Gift also quotes Pepperdine Graziadio Peate Institute for Entrepreneurship Executive Director and Professor of Finance John K. Paglia, PhD, CPA, CFA as follows:

"Gross margin and operating margin are well defined and accepted business metrics. Gross margin is defined as gross profit (revenues minus cost of goods sold) divided by revenues. Operating margin has additional (operating) expenses deducted and is defined as operating income divided by revenues. Given gross margins generally average 3-4x operating margins for publicly traded companies in the aggregate, their relative valuation metrics will also be significantly different. Misinterpreting or confusing these while performing a valuation analysis could have serious investing consequences."