When you're looking at a company's press release, remember that sometimes numbers can be misleading. It's smart to not take what you read at face value. Be skeptical. We often do this when reading words, but we should think critically when reading about numbers, too. Here are some examples of how things are not always what they seem in company press releases.
Consider that many companies will report "record earnings." This isn't always as impressive as it sounds. Feline Footwear (ticker: MEOWW), for example, might earn a record $3 per share in 1996. If it earns $3.01 in 1997, $3.02 in 1998 and $3.03 in 1999, each of those will also be "record earnings," but they'll represent meager growth. You need to examine howquickly a company's earnings are growing. But that alone isn't enough, either.
Imagine Yamburgers Inc. (ticker: YAMBS), which reports that its revenues advanced 200% over the past year. That's more telling than "record growth," and it would intrigue most investors. Check to see what the actual revenue numbers are, though. Perhaps Yamburgers has been struggling and took in only $300,000 in 1998. Growth of 200% would put revenues at $900,000 in 1999. That's still mighty tiny.
It's important to consider companies in the proper context. A behemoth such as Wal-Mart can't double earnings as quickly as a small upstart can. It's usually easier to double $10 million than $100 billion. As companies grow larger, their growth rates tend to slow down. You can't keep tripling each year forever.
Another potential danger is the "annualized" growth rate. When a company (or mutual fund) takes its total return over a number of years and "annualizes" it, it's telling you how much it earned, on average, per year. This is handy, but check what period of growth is covered. For example, if the Dodgeball Supply Co. (ticker: WHAPP) increased its earnings from $0.12 per share in one year to $0.37 per share five years later, its annualized growth is about 25%. If Spray-On-Socks Co. (ticker: PFFFT) doubled its earnings in three months, its annualized rate would be more like 1,500%. Does that mean we can expect 1,500% each year? Not likely. Annualizing a short period's returns can magnify the numbers and distort things. Those might have been extraordinary months.
Minding the numbers can pay off.
To learn more about investing Foolishly, visit our Fool's School and our Investing Basics area. You can also check out our Fool by Numbers articles, designed to present raw earnings information in one easy-to-read place. Or try out some of our inexpensive and well-regarded online how-to guides, which come with money-back guarantees.
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