Earnings season is upon us and we now get to look at how our businesses have performed over the last twelve months.
There are dozens of different things that an investor can look at, so it's hard to know exactly what to focus on. Obviously investors would hope that every statistic improves but these are the main four I will be looking at for all my investments:
This seems fairly obvious, but it shouldn't be underestimated. Revenue growth shows the business still has more growth potential (no matter how big it is).
If a business is growing revenue at inflation levels or slower, that isn't a good sign for future market-beating returns.
Businesses usually report several different margins. The gross margin, the net profit after tax (NPAT) margin and the earnings before interest, tax, depreciation and amortisation (EBITDA) margin all reveal slightly different things and are all important.
The bigger a business gets the higher its margins should go. If the margins aren't getting bigger then there should be a good explanation, hopefully it's because of some short-term expenditure that will increase long-term returns.
Earnings per share
Everything a business does, whether increasing revenue or decreasing costs, should flow through to reflect in growth of earnings per share.
If a business has issued more shares to dilute current shareholders the earnings per share figure will be affected. That's why I think it's the best statistic to measure profit growth.
Assuming the business has grown and the earnings per share has increased then I'd like to see shareholders rewarded with a higher dividend.
Even if the dividend growth is less than the earnings per share growth it's a good way to reward the long-term shareholders and not the ones trading in and out of shares regularly.
I think there's a lot to gain by just looking at the above four statistics. Debt and cash flow changes are also good to monitor too.
It doesn't matter if you're a shareholder in large caps like Commonwealth Bank of Australia (ASX: CBA) and Wesfarmers Ltd (ASX: WES) or small businesses like National Veterinary Care Ltd (ASX: NVL) and Pureprofile Ltd (ASX: PPL), it's important to know which direction your businesses are heading.