It doesn't even tell you that very well. If you are losing muscle, you are likely becoming less healthy. The scale is an awful tool for measuring health.

I think you've lost track of the big picture here. Measuring against the goal of weight loss is the point. In absolute terms it's a terribly inaccurate way of finding calorie use, but in diet-management terms it's perfectly sufficient. Despite a multi-pound margin of error, given several weeks of data you'll have more accurate information on net calories than on income.