Food writer Michael Ruhlman recently wrote about the noble spoon, explaining that, "The best tools are the simplest tools." That got me wondering what the best, and simplest tool would be in the average investor's toolbox.
Price-to-earnings (P/E) ratios are pretty simple and usually readily available, with no need for us to calculate them ourselves. But they use earnings per share as a key component, and management can fiddle with those earnings, at least to some degree. Plus, most P/E ratios you'll run across are based on past earnings, not future ones. In short, they're problematic. My colleague Rex Moore has even called them dangerous!
Many experienced investors think that return on invested capital (ROIC) is one of the most useful tools. But it's far from simple. The dividend yield is simple, but I'd argue that by itself it doesn't tell you enough. Some dividends can be dangerous, too.
So what would the simplest tool be? Well, I nominate revenue growth. It's so simple that you can just eyeball it. Check out the following companies, for example, and their last three annual revenue figures:
|
Company
|
2008 Annual Revenue
|
2007 Annual Revenue
|
2006 Annual Revenue
|
|
Baidu (Nasdaq: BIDU )
|
$469 million
|
$239 million
|
$107 million
|
|
Amazon.com (Nasdaq: AMZN )
|
$19.1 billion
|
$14.8 billion
|
$10.7 billion
|
|
Tiffany (NYSE: TIF ) *
|
$2.9 billion
|
$2.9 billion
|
$2.6 billion
|
|
General Electric (NYSE: GE )
|
$183 billion
|
$173 billion
|
$163 billion
|
|
Intuitive Surgical (Nasdaq: ISRG )
|
$875 million
|
$601 million
|
$373 million
|
|
Boeing (NYSE: BA )
|
$61 billion
|
$66 billion
|
$62 billion
|
|
Schwab (Nasdaq: SCHW )
|
$5.4 billion
|
$5.6 billion
|
$5.0 billion
|
Data: Yahoo! Finance.*Annual revenue for Tiffany is for the fiscal year from Feb. 1 of the year given through Jan. 31 of the following year.
Notice how easy it is to spot fast growers, without having to precisely calculate that, for example, Baidu's revenue grew at 109% annually over two years, or that Amazon.com's grew at a roughly 34% annual rate.
Notice, too, how useful this info can be. It can help you spot companies you want to evaluate more closely (and which ones you might want to skip), and it can give you something to compare other numbers to. For instance, if Boeing's income is rising at a good clip, even though its revenue isn't, that means it's wringing more pennies of earnings out of each dollar of sales, or that its income is increasing in other ways, perhaps through lower taxes.
Revenue is where it all starts -- it's a company's top line. If you're looking for fast growers, revenue's a great place to begin your search.
High-growth companies can be among the best-performing investments you'll ever own. But do you have the guts to buy them?
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