Go Beyond the Financial Statements: Break a Company Down Revenue Line by Revenue Line
One of the biggest issues I come across when talking with people about specific stocks is that while we can have a good discussion of bottom-line numbers like earnings – the discussion of items higher in the income statement is not so good. Andrew and I did a podcast about this recently. It’s the one where we discussed gross profits. But, it’s not just an issue of gross profits. It’s also an issue of what are the customer economics like, what are the store economics like, what are the “unit” economics like. A lot of times, this information is given out by the company – if at all – in ways that don’t guarantee an easy comparison between two companies. The bottom line figure is probably comparable (though not always – note, for example, that different companies in the same industry sometimes depreciate at different rates and so on). However, the way companies discuss their projections for store level EBITDA of a “model” store or customer level economics are going to be different. Does this make them less useful? It makes them more susceptible to fudging. You have to rely more on whether management is being candid, realistic, etc. Is management promotional? Are they always too optimistic? Are they always too pessimistic? Do the numbers they give you as projections of how their business model should work line up nicely with reported results? If not, why not?
These numbers are often more important for the long-term investor than the current earnings results. Current earnings – and whether they miss or beat analyst estimates and market expectations – are very important in determining short-term results in the stock. But, they are less important in determining long-run results. This is because just knowing the bottom line result is less helpful in projecting the future of the business than in having more detailed trend information.
The same stuff I’ve been saying about the “bottom line” also applies to the “top line”. For example, OTCMarkets (OTCM) reported results recently. Both bottom line and top line numbers were right in line with what I might expect. But, the mix of what areas of the business were up a lot and what areas of the business were flat or down was different than I’d expect. So, it could’ve looked like a typical quarter if you look only at: revenue, gross profit, operating profit, etc. But, it looked atypical if you focused in on what specific product lines were up by what percentage amounts over last year. They had a very bad showing – no growth, actually a bit of shrinkage (which is unusual for this company) – in the actual number of companies that pay for “corporate services” (sort of like being listed on OTCM – although, technically, OTCM is not an actual stock exchange). Meanwhile, revenue that is driven by trading activity grew way more than you’d normally expect. Now, none of this should’ve come as a huge surprise to me given the level of …
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