Be smart about numbers

In your investing life, and in life in general, you need to be savvy about numbers — because some are not quite as good or bad as they may seem. Here are some tips to keep in mind as you evaluate news stories, earnings reports or press releases.

Imagine, for example, that a company you’re thinking of investing in announces “record earnings” for its last quarter. That sure sounds great, but perhaps it set a record last quarter with earnings per share (EPS) of $2.50, and this past quarter it reported EPS of $2.52. That’s less impressive, right? Look for meaningful growth rates — ideally long-term ones — instead of record highs.

Look closely at robust growth rates, too: Imagine that the Home Surgery Kits Co. (ticker: OUCHH) reported revenue up 100 percent over the last quarter — a doubling. Check to see what its actual revenue was. If it only went from $200,000 to $400,000, that’s rather puny, and such a small business is not ideal for most stock investors.

Meanwhile, if a company has grown huge, raking in $100 billion annually, know that it’s reasonable for its growth rate to slow. After all, it can be harder to go from $100 billion in revenue to $200 billion than from $100 million to $200 million.

“Annualized” growth rates, showing how much a company (or mutual fund) earned, on average, per year can also be tricky. It’s smart to check exactly what period of growth is reflected, and to look for any single unusually large number that might have skewed the average. For example, if a mutual fund has an unusually steep average annual growth rate of 29 percent over five years, it might be due to a single year in which it earned, say, 86 percent — a return that it won’t likely be able to repeat.

Look beyond numbers, too. A company might have posted strong growth, but there might be trouble ahead if a new rival is stealing some of its market share.