Growth Investing

Earnings drive stock prices--but understanding earnings goes far beyond glancing at EPS. The article breaks it down into five key steps: from looking at year-over-year growth to digging into margins, analyst revisions, and the sustainability of results.

How do you evaluate corporate earnings when deciding whether to invest in a stock? Do you focus on growth trends, quality of earnings, analyst expectations--or something else entirely?

Let's compare approaches. If you haven't read it yet, the article offers a solid framework for getting beneath the surface: How to Analyze Corporate Earnings in Five Steps (July 2025, by Charles Rotblut). 

Without giving a short course on Rob's method of analyzing a stock, I will say that the first and most important thing I look at in a company's financials is revenues. If they're decreasing over time, then I want nothing to do with the company. While some great investors (John Templeton, for example) have made fortunes off of "turnaround" stocks, I take Clint Eastwood's advice and know my limitations. Turnarounds are not my game.

Contrary to Charles's views on analyzing earnings, I do not give a whit about analyst estimates or revisions. I've found analysts' prognostications to be as reliable as a politician's promise to stop illegal drug smuggling. Management's forward guidance isn't much better. If I want to rely on a crystal ball, I'll use my own.

I'll also confess that I find cash flow from operations to be a much better indicator of a company's health than accrual-based profits. Free cash flow is also more essential than "earnings." 

Of course, all this is just one lowly investor's humble opinion. To top it off, I rarely get excited about the latest quarterly results for a company. I'm in the game for the long haul, and there will always be smooth stretches as well as bumps in the road. If it weren't for the ups and downs, just think how boring life would be!

Rob, I agree with you completely. I do not use anything that is projected into the future. I adjust operating income by subtracting out accruals and use cash from operations. I am a big believer in economic profit and use it in a variety of ways.