You’ve probably heard the popular sports cliché about winning being the only thing. Similarly, in the stock market, earnings is the only thing that matters at report time. But, except in cases of fraud or very creative accounting, earnings don’t come out of thin air. In this chapter, you’ll learn how to analyze the underpinnings of a company’s reported earnings and its future earnings prospects. The components of profitability analysis include:
Sales and sales growth
The first two, sales and profit margins, determine reported earnings. The latter two, profitability ratios and cash flow, tell you what’s behind the raw numbers.