4 things I’m looking for this reporting season

Reporting season is nearly here. As an investor it’s one of the most exciting times of year for me, besides Christmas for family time.

We get to see whether the convictions we have about the businesses we own are correct. We also get to see if the market agrees with our thoughts, but that’s less important in the short-term.

Most things a business reports are important, but there are four things in-particular that I am looking for this reporting season:

Revenue growth

One of the main things I’m looking for is revenue growth. This signifies that the business was able to increase its prices and/or grow its number of customers. If a business struggles to do either of those two things then there’s a good chance it’s going to be a mediocre long-term investment.

If a business can’t increase its prices then it probably doesn’t have much of an economic moat. REA Group Limited (ASX: REA) is a good example of business that’s able to increase its prices.

If a business isn’t growing its number of customers then that could be a sign that it’s losing market share, considering the global and Australian populations continue to grow. Xero Limited (ASX: XRO) is a good example of a business that is becoming increasingly popular with subscribers.

Margin growth

As businesses grow larger you would hope that profit margins grow bigger as economies of scale come into play.

Ideally it would be great to see the gross margin, earnings before interest, tax, depreciation and amortisation (EBITDA) margin, earnings before interest and tax (EBIT) margin and the net profit after tax (NPAT) margin all increase.

a2 Milk Company Ltd (ASX: A2M) and Altium Limited (ASX: ALU) are both great examples of businesses that are increasing their margins almost every report.

Earnings per share growth

Everything that a business does should be with the end goal of increasing the earnings per share (EPS). If a business isn’t trying to improve its bottom line for each individual shareholder then I don’t think that business is worth owning for the long-term because the share price is unlikely to grow.

You should also hope that your business grows EPS at good rate, as this leads to stronger compounding profit.

Improving cash position

I want to see my businesses improve their cash positions. That means improving their net cash/debt position and also an improving operating cashflow position.

In this era of rising interest rates and an uncertain Australian economy I want my shares to have strong balance sheets and not suffer from customers taking longer to pay. This is a key thing to monitor.

Foolish takeaway

I have a feeling this reporting season could have a lot of negative falls this time around, with a lot of ‘growth’ shares having perhaps almost unrealistic expectations built into the current share price.

These top shares are very likely to do well in reporting season, which is why they should be on your watchlist.

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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of A2 Milk, Altium, and Xero. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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