6-06 Revenue and Earnings Estimates

When you’re considering buying or selling a stock, it is just as important to look at future expectations as historical performance. We can read all of the [ts]10-Ks[tm]The annual SEC filing by public companies that includes their audited Income Statement, Balance Sheet, Cash Flow Statement and other detailed notes about the companies financial and operating conditions. [te] and [ts]10-Qs[tm] The quarterly SEC filing by public companies that include abbreviated, unaudited financial statements. [te] we want; we can study the Income Statements, Cash Flow Statements, and Balance Sheets until we have them all memorized; but that is only half of the battle. A company’s value, and therefore its stock price, is a combination of its current value and its forecasted future earnings.

The company’s revenue and earnings estimates that you see published by the company, and the many Wall Street analysts that follow that company, should be an important element of your buy/sell decision. However, don’t merely read these projections and accept them as fact.

Learn what criteria and assumptions helped create these estimates. What is your opinion on the company’s outlook? What is your understanding and expectation of the economy and the business cycle? Are we slipping into a recession? Does this company truly have a product that everyone in the world wants to buy? You should try to read some expert opinions that comment on the validity of a company’s projections. Sometimes you will learn of well-constructed, thoughtful, fact-based assumptions that create solid revenue and earnings estimates. You’ll also probably find some projections that are little more than a “wish list” created by a company’s management that make a few too many assumptions for you to believe.

As you follow the news for a particular company, you will notice how Earnings Estimates will change frequently over time as business conditions change or as the economy shifts. This is normal and goes to show how these are only estimates about an uncertain future. Never should you invest strictly on an earnings estimate or a recent change in an earnings projection.

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