Re-reading older posts in order to better understand things I kind of glossed over the first time through.
I had not seen your reply earlier. I’m glad that took my post as irrelevant, because it was. I regretted it shortly after posting, but there’s no way to edit or delete a post once posted.
I was out of line in expressing some exasperation with your posts. You obviously understand financial analysis to a far greater extent than I do, or probably ever will. I’m not interested or motivated to get into all the fine points.
In fact, all I am truly interested in is gaining sufficient financial insight in order to feel comfortable with an investment decision. I never make investment decisions based exclusively on the “numbers,” I am far more interested in the actual business, the products/services of the business and the management team. I use the numbers as a sanity check, not as buy/sell criteria.
So, it’s quite likely that you may have some exasperation with my posts, but have the good sense and tact to refrain from expressing it.
Chris,
I’ve been going back to older posts in order to capture some of the things I missed first time through.
If you’ve read a few of my posts you’re undoubtedly aware that financial analysis is not one of my strengths. I base my decisions more on the business model and operations. I look at the products/services of the business. I look for the breadth and depth of the company’s moat. I try and get a profile of the management and labor relations. For me, the numbers are more or less a sanity check, the numbers alone are never sufficient for me to make an investment decision about buying or selling.
With that preamble, I’ve come to believe that having accurate knowledge of earnings history is pretty important. Which brings me back to your post about how to adjust for stock based compensation. I am aware that not everyone agrees that this is an appropriate adjustment to begin with, but rightly or wrongly, I’m going to accept that it is. So here’s the question. Your example works through the adjustment by starting with EPS rather than quarterly revenue and expense or GAAP earnings. So how do you adjust if there’s also a major expense (i.e., Starbucks just bought all the Japanese franchise stores) or revenue event (i.e., a favorable settlement from a legal dispute). These situations describe extraordinary events which are not directly tied to EPS.
brittlerock,
If you’ve read a few of my posts you’re undoubtedly aware that financial analysis is not one of my strengths. I base my decisions more on the business model and operations. I look at the products/services of the business. I look for the breadth and depth of the company’s moat. I try and get a profile of the management and labor relations. For me, the numbers are more or less a sanity check, the numbers alone are never sufficient for me to make an investment decision about buying or selling.
When investing numbers are extremely important. There are historical numbers such as past revenues and earnings, there are current numbers such items on the balance sheet, and there are future numbers. Numbers give you a measure of risk, growth, current value, and an estimatation of future value. Numbers are also important in many other aspects of life. Take shopping for instance. Assuming you have a limited budget as most people do, how much you spend is important. When you shop for a new pair of shoes, the price is usually important. Would you pay $50 dollars for a new pair of sneakers? Would you pay $5000? This may sound silly but the point is if you have no idea how much a new pair of sneakers should cost then how would you know if $5000 is to low or too high? You would probably consider your own monthly budget. If you earned $10,000 a month, $5000 for a new pair of sneakers would seem like a lot; $50 might seem like a great deal. What if you could get a pair down the street for $10? Then $50 might seem expensive. Understanding the numbers of a business gives you information that you need to calculate the worth of that business. It also gives you a way to compare one business against another.
Now when you say that other aspects (moat, business, model operation, etc) of a company are more important, what you are really saying is that you think that the future success of this business depends on these aspects being acceptable. But what does this really mean? I think what you are saying is that you want to know that the business is sustainable and will be able to thrive going forward. Again, the measure of future performance is the future numbers. The future earnings per share.
So predicting the future earnings per share is important. It is very important. I agree that the future numbers are more important than the past numbers. The past numbers usually give some indication of the future so they are used. The farther the future is away the less precise of an estimate you can expect to make. But again, the past is often a very important indicator. Hence, you want the past numbers to accurately reflect how the business is performing to you can better estimate the future. Therefore, you want to get as accurate a gauge of the performance of past business operations. For this reason, people often remove numbers that affect earnings or earnings per share or revenue that are not related to the business performance. This will give you more accurate growth rates of key metrics which will allow you to better estimate future performance. The important thing here is to try to use common sense. Remove items that are one time (I mean really one time as opposed to “one time” every quarter). If the company deducted such a one-time expense from its taxes then you want to subtract the expense but then add back the amount by which their taxes were reduced so you remove the entire net effect. Remember the purpose is to get an accurate gauge of operational performance so you can better predict future performance. Use your common sense. Hope this helps.
Chris
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started investing when Peter Lynch and Louis Rukeyser were buds on the Friday PBS program
Jim, I originally missed this post, but reading it brought back great memories of growing up and sitting with my late grandfather as he watched this show each week and talked to me about investing. I don’t really remember much about the show itself, but I certainly enjoyed the discussions with my grandfather. My situation would be very different today if it hadn’t been for that time together.
Neil
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I agree that the future numbers are more important than the past numbers.
The problem being, of course, that the future numbers are really only guesses. In some cases, they may be guesses with fairly firm foundation, like next quarter’s revenue for a reasonably established business with an established sales pipeline, but for many of the companies we discuss, the guess comes closer and closer to seat of the pants speculation. Any time one has a fast growing company, a twitch in pace up or down can make a big difference in that projection in a very short amount of time.
Neil,
What a wonderful life changing memory you have of your time with your grandfather based on investing. Thanks for sharing.
Maybe our time spent investing in those we love is, in the long run, the most profitable investment we can ever make.
Jim
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