As for the enterprising ledger, WorldCom lost money every year when you convert intangibles from operating expenses to capital assets (which tends to boost earnings) and also take into account the implicit (but real) opportunity cost of stockholders' equity (which usually reduces the bottom line).

Because of the accrual P&L's four major limitations, I prefer to focus on the relationship between the defensive and enterprising income statements. Specifically, I want to see if these two alternate profit (loss) figures intersect in the upper-right box of a four-box matrix. Companies in what I call the Earnings Power Box possess authentic earnings power. If you're a long-term, cautiously greedy investor, these are the best companies to own.

As we see below in Exhibit 2, WorldCom never occupied the EPB. Instead, it was in the upper-left and lower-left boxes. For all of the favorable press this company garnered in the years leading up to its demise, the brutal fact is that its earnings quality, based on what we now know are fabricated numbers, was so-so at best.

Do yourself a favor: Don't buy companies with defensive and/or enterprising losses unless you know what you're doing.

It may interest you to know that I do post-mortems of every big company that costs investors money, and my research shows that the defensive and/or enterprising income statements are almost always better leading indicators of trouble than accrual P&L. Here's my list of companies that have cost investors billions in recent years, and which of my alternate earnings statements raised the red flag first.

Better Leading Indicator of Falling Stock Prices
"Defensive"	"Enterprising"	"Both"
Autozone	Bethlehem Steel	Allou Health & Beauty
Bombay Company	Boston Chicken	Casual Male
Centennial Technologies	Crown Cork & Seal	Enron Corporation
CKE Restaurants	HealthSouth	IBM (early '90s)
CML Group	Ikon Office Solutions	Office Max
Fine Host	Polaroid	Pep Boys
Gateway	Rite-Aid	Sunbeam
Gap, The	Sherwin-Williams	Warnaco
Lucent Technologies	Stone & Webster	Xerox
Measurement Specialties	WorldCom
Tyco
United Airlines