It’s just math, right?
Whatever.com just produced $1.32 in earnings…one hundred thirty two cents of Wall Street lovin’ profit. How can there be a, uh...quality to that number? A number’s a number, right?
Well. Yes. But, rather, there are different qualities of earnings. What if we told you that 100 percent of whatever.com’s earnings came from ads it sold to 40,000 different buyers, because its website was just that popular? All of the growth came intrinsically, meaning that users just loved using it and nothing meaningful changed on their balance sheet other than that the cash account went up.
Okay. Very high quality earnings.
Really? Sure ‘bout that?
Hm…well what if we told you that 70% of their ad sales came from a subsidiary in China…and were all collected in RMB (the Chinese currency)? And that, in this quarter, the Chinese currency appreciated 38 percent. Essentially, all of their big growth came because the Chinese currency did well...not because their business did well.
So…wait. Had the Chinese currency just been flat, the company wouldn’t have earned anything close to $1.32…70 percent of the sales and almost 40 percent currency gain? It means that the company happened to have a lot of sales in a country with a fast appreciating currency; it wasn't necessarily a direct reflection that the company had high quality earnings .
Yes, it's great that they were in a hot market in a highly appreciating currency. But if the currency hadn’t gone up so much relative to the US dollar in which they report their earnings, the real earnings then would have been more like a dollar. Maybe less. So that’d be low quality earnings.
What about high quality earnings? Well, really simply...you said you’d sell 300 tractors this quarter. The Street thought you’d sell 310. You actually sold 320. You said margins would be 20 percent. The Street thought they’d be 22 percent. They actually were 25 percent. You said you’d generate $20 million in cash. The Street thought you’d generate 22. And you actually did generate 25.
Simple. You just did your core business…selling tractors…well. Quality earnings. Quality tractors.
Related or Semi-related Video
Finance: What are trailing earnings?11 Views
finance a la shmoop what are trailing earnings here are the trailing earnings
for whatever dot-com 23 cents 32 cents 41 and 52 cents and a quarter quarter [Trailing earnings figures appear]
quarter quarter yeah here's where we are on the timeline today we just finished
the first quarter of the new year to print that lovely 52 cents a share in [Shares printing]
earnings well the stock of whatever.com is trading at a hundred bucks a share
and tons of nervous Nellie investors are pulling out their hair over the very [Hair falls on floor]
high multiple that this stock is trading at so the trailing earnings of whatever
dot-com were well let's just add him up here in 23 32 41 52 totals a buck 48 [Share prices appear]
that's a dollar forty eight in trailing earnings so the years trailing earnings
of the company were a buck 48 and that means that at $100 a share with no cash
and no net debt to worry about here the company is trading at a hundred divided
by a dollar forty eight or about sixty seven times earnings there's nothing
funky going on in the balance sheet here whatever dot-com has a little bit of [Man holding a balance sheet]
cold cash and no debt so 67 times trailing earnings here is a huge
multiple it's a multiple of trailing earnings but look at the trend in
earnings growth the company has stated that it thinks it'll keep growing at [Growth percentage bar chart appears]
quote about this pace for the foreseeable future
unquote so if we do a little estimating then forward earnings might see them
print something like go I don't know 64 cents then 80 cents and 95 cents and a
buck 12 or something like that well if we add up those subsequent forward [Quarterly earnings appear]
quarterly earnings numbers we get $3 and 51 cents a share in earnings so wait a
minute we just came to the conclusion with the nervous Nellie's that this [Stop sign appears]
stock was so expensive when they were thinking about it as a hundred times
earning stock but on the projected forward earnings of 3.51 a share not a
hundred bucks it's trading at 100 divided by three point five one or about
twenty eight times earnings just a tad more than while say Bank of America or [Logos appear]
caterpillar Tractor or coca-cola but whatever dot-com is growing earnings at
like ten times faster pace than those old stalwart
companies they're a lot more risk that whatever dot-com misses its earnings
numbers yes absolutely but if it hits the 3.51 and then goes on to earn oh no
six bucks and then ten bucks a share in the subsequent years well the hundred [Whatever.com share price on graph]
dollars a share price here will look like a bargain in the rearview mirror so
that's what trailing earnings are all about you pick a spot in time and look [Calendar appears]
at the previous and I'll say four quarters earnings and then you think
about what multiple of that number of the stock is trading at and then map
that to future prognostications if the company is really growing this fast well [Whatever.com tree appears]
then even though it's multiple on trailing earnings might be high while on
forward earnings it might be low may be a bargain
just ask Amazon about this one they wrote the book on the trailing earnings [Amazon graph of stock price]
and guess where you can buy that book
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