Don’t Be Fooled by Numbers

Great investors look at numbers carefully and critically, because they’re not always as terrific (or terrible) as they may seem. Don’t get too excited, for example, if a company reports “record earnings.” Perhaps Farm Dogs Inc. (ticker: BINGO) earned $2.75 per share in 2015, $2.76 in 2016, $2.78 in 2017, and $2.80 in 2018. That $2.80 might be a record high, but it’s also marking merely a 2 percent total increase over four years. Look for growth rates instead of record highs. Next, imagine that Chicken Little Industries (ticker: SKYYY) reports revenue up a whopping 100 percent over the past year. That’s more telling than “record earnings” and would intrigue most investors. Look into what the actual revenue numbers are, though. Chicken Little may have taken in only $250,000 in 2017. One hundred percent growth would put it at $500,000 in 2018. That’s good, but it’s still a meager sum. Put each company in context, too. For example, smaller companies can grow more quickly than larger ones, as it’s usually easier to double $50 million than $50 billion. As companies grow larger, expect their growth rates to slow. They can’t keep doubling annually forever. “Annualized” growth rates can also fake you out. 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 can be meaningful, but it’s smart to see exactly what period of growth is reflected, and also to check for any single outsize number that can skew the average. Groundhog City (ticker: WDCHK) may have increased its earnings from $0.50 per share in one year to $1.00 five years later, giving it an annualized growth rate of 15 percent. If Buzzy’s Broccoli Beer (ticker: BRRRP) doubled its earnings in three months, its annualized rate would be more like 1,500 percent. Annualizing a short period’s returns can magnify the gain or loss. Those might have been extraordinary months. The closer you look at the numbers, the more you can learn.