Funds From Operations - FFO

You're an investor. You just found the stash of gold bars your great-grandfather buried in the backyard when he thought the communists were planning an imminent invasion. You've decided to sell the gold and invest the cash into the stock market.

When judging the financial health of most companies, a key metric is "earnings per share," or "EPS." It takes the company's accounting profit line and divides it by the number of shares outstanding.

That figure works for most companies. However, it doesn't provide much information about a category of firms known as Real Estate Investment Trusts, or REITs. These firms operate in the real estate business. They might own shopping malls, or office buildings; they make their money by buying real estate and collecting rent.

Because of the nature of the business and the legal requirements related to maintaining REIT status, EPS doesn't provide a good gauge of the company's bottom line for investors trying to evaluate these real estate-centered companies. Many REITs take advantage of leverage (debt) and other odd accounting tricks to minimize taxes, thus showing less in profit and saving IRS checks. Instead, "funds from operations" becomes the key stat for most REITs.

FFO measures the cash flow a REIT generates from operations. It includes earnings, along with depreciation and amortization, but leaves out any gains the company may have registered from sales of real estate. For investor purposes, it is usually presented as a per-share number, similar to EPS.