It has been a few weeks since I posted, I've been up to my neck in an ichthyology project. It is a fishy project at best.
Time to take a look at three of the biggies investors look at when sizing up a company to invest in, Sales, Profits, and Earnings.
Sales. Sales is just what it says, how much did the company sell. Many investors ignore this figure in favor of earnings and profits. Should we? No way. Sales is the hardest of the tree metrics to manipulate and gives a truer reading of what the company is doing. Can they be manipulated? Sure, Enron did a great job of manipulating their sales figures. A quick look at sales, assuming they are not playing games with them, will tell you how well the company is doing. Do the sales figures go up compared to last year or down. Even if the company discounts its products, if the sales figures are going up, they have sold more. Sales is the only way to bring money into the company. No sales, no company. This is an important figure that should not be overlooked when evaluating a company for investment.
Profit. Profit is good. Profit is great, but profit can be fudged a lot more than sales. Sales is right there, either it was sold or it was not. With profit, a company can have falling sales, cut staff, shut factories, use cheaper materials and by doing so boost the profit line. The company will show a profit, but if the company is showing glowing profits, but sales are down, something is happening to make those profits. Could the company just become more efficient? Yes, this could be an answer to help profits, but at a certain point, without the sales side of the equation growing or at the very least maintaining and profits keep improving, it may be a sign the company is in trouble and should be looked at closer. A company that has flat profit and sales could be a good company to invest in. What do I mean by flat? Sales and profits stay the same year after year. So if sales are say $2M for the last five years and profits are $500K. The company is looking good. Expand or die is a great battle cry, but it can also lead to over extension, over leveraging (taking out loans) and if sales go down, cause a sudden down turn in the size of the company. Take a look, good solid sales and constant profit can be a good investment.
Earnings. This is short for Earnings per Share or how much the company earned per share of outstanding stock. This number is the easiest to manipulate. Sales are off, profits are down, buy up a bunch of stock from the market, put it in the safe and suddenly earnings/share looks really good. Think about it. If a company does a stock buyback, then it doubles its earnings/share. If an investor is just looking at earnings/share and not tracking over time the numbers of shares outstanding, it could be a bad bet to invest in the company. If sales are down and profit is down, but earnings are up, walk away. This is a way the company can look good on paper when it is really in trouble.
In short, if a company is being considered as an investment, I am talking long term investment not an investment of a few days or weeks, the investor needs to look at the history of all three metrics before investing. This is part of what is meant when investors talk about "due diligence". Don't invest in a company because they are touting large earnings/share, look and see if they are also touting large sales and profit.
Thanks for reading.
'till next time.
hardlo