How to judge your company performance?

Here is an interesting article published in Rediff Business that talks about how to judge the performance of the company in which you hold your investments. With the year-end results just kicked in and companies started announcing results, it becomes imperitive that you know howto read those earnings numbers and come to the conclusion in termsof setting your expectations and checking your options.

As an investor in stocks, there are a few rules to follow. Getting stuck with just numbers can hurt badly. For example, most companies are likely to show great growth numbers if one were to compare with March 2009. But, investors should remember that 2008-09 was an exceptionally bad year because of the global recession. Therefore, it is important to do a little research and put the numbers in the perspective.

What’s the right number? A number reflecting the performance of a company is important. Most analysts go by either last quarter (quarter-on-quarter basis) or an yearly number (year-on-year basis). For some sectors, y-o-y is the right parameter, whereas q-o-q makes sense for others.

Year-on-year comparison is valid mostly for cyclical businesses or for ones with long gestation periods. Example: infrastructure and construction sectors have long gestation periods, while cement and sugar businesses are cyclical.

Events that impact: Results numbers, when compared, should not be with a period that was impacted by some specific changes in business condition. For instance, if a company has acquired another company or has diluted stake, the results numbers need to be adjusted for a common base. In this case, a jump in profit may not reflect an actual improvement in performance, but be mainly due to addition of the numbers of the acquired company. “That is when companies have to give adjusted profit figures also,” said an analyst.

Sector-specific numbers: The obvious numbers one needs to look at in results is net profit, sales and earnings per share (EPS). But, there are some sector-specific ones. For instance, a construction company’s order book is important because it gives an idea of future earnings. Similarly, a telecom company’s revenue market share is more important than its subscriber base. A real estate company’s land bank is a key factor. Gul Teckchandani, investment analyst said, “Look at the exploitable land bank and the value of the real estate.”

Accounting policies: Different companies adopt varied accounting styles. There are times when this is changed for specific items like break-up for different businesses, investments, foreign exchange dealings, derivative instruments. For instance, L&T provides a break-up of all its businesses - construction, power, electrical, financial services, etc. Many others do not give a break-up. Profits have to be real and sustainable and not just rising due to book entries.