I note that over the last few years that news reports regarding quarterly earnings have taken on another dimension — revenues get tracked as well as earnings. I look at that and I shrug. Not every sale is a good sale. In overly competitive environments we should want to see companies making fewer sales, and perhaps shrink aspects of the company that can easily be rebuilt.
So when the companies that I own miss revenue estimates, I don’t care much. I care far more about their discipline to obtain quality business that produces reliable profits.
This is a different story with growth companies, which I don’t generally invest in. Growth companies should see reliable and large increases in sales.
Perhaps some analysts think that growing revenues supports growing earnings. It would be far better to look at operating cash flow, or lack of growth in accrual items to validate earnings. The less earnings coming from accounting accruals, the better the quality of earnings.
That’s all for now. The quick summary: ignore revenue estimates, and check accounting quality.
By David Merkel, CFA of Aleph Blog
