Company earnings
Last week, I got an email from a student, and he wanted to know how to predict company earnings. I replied him giving the following example.
You, as a security analyst, work on financial analysis of companies. The dividend yield, PE ratio, Debt-Equity ratio, Net worth, Price to book ratio, you name it and the ratio throws figures at you. The crux is not the numbers but the interpretation of it. The same goes with financial modeling and forecasting of the company’s financials. In financial modeling, I think, it is the input that makes the modeling meaningful. Many times the analysts get confused and lost in their own financial models as they are not able to limit the scope of it and so, I prefer simple,easy-to-use model for predicting the financials of a company.
Lesson: Do not go for a complex model unless it is required.
Well, coming back to the point of predicting the earnings. I would like to give you a real-life example of two Indian-listed companies, Titan Industries and Unitech Ltd.
What are company earnings?
What is the earnings figure we are considering here? It is Earnings Per Share or EPS.
Let’s look at the following table and see which company’s EPS is easy to predict.
Which one do you think is easy to predict?
Company Earnings Estimates
You are right! It is Titan Industries which is giving strong EPS and that too in upward trend. No doubt, the share price reached Rs. 4000 in 2010 from Rs.40 in 2001 (100 times growth).
What propelled this growth? Many factors. More on this, later.
The point I want to make here is, go for companies which are easy to predict and then do the forecasting. There is no dearth of such companies in market and as a security analyst your job is to find such gems.
Here’s a detailed course on how to predict company earnings.
Have you found any such interesting company? Share your views here.
Hi sir,
I have gone through both the articles of yourself and the other person. my question is, what are the various factors which should be taken into account while assuming the earnings growth rate apart from determining current life cycle stage of a company. if possible please explain in detail
Syed,
Many factors play an important role, like demand-supply mechanism, economic and political stability, management, micro and macro economic factors play an important role.
We will write on earnings growth soon.
Keep visiting.
Hi Sir,
My hearty congrats on starting this wonderful blog and I pray for its successes.
Here I want to share a simple logic for estimating growth rate which will in turn helps in arriving at future earnings.
For predicting earnings first we need to estimate growth rate, based on which future earning will be arrived. For determining an appropriate growth rate divide company’s growth into 2 stages – First stage and second stage. First stage will consist of approximately initial 10 years of the growth cycle, for this period higher growth rates will be assigned since the sales and earnings rate will be high because of less competitive pressure, decreased cost of production due to economies of scale, etc. In the Second stage lesser growth rates will be assigned as the company will be in maturity stage or decline stage. So, while predicting/forecasting earnings it is very important to know which stage the company under study is in.
Another way to arrive at earnings is through “Consensus earnings estimates method”. Under this method earnings will be forecasted based on the average of the forecasts from individual analysts tracking a particular stock/company. Like, for a big company average of 30 to 40 forecasts will be considered and for a smaller company average of 3 to 5 forecasts can be considered.
Please give your insight on this.
Thanks & have a nice day
Thanks Khalida for appreciation and love.
Both the approaches are good. However, it is important to predict the growth and stable period. The second approach is good too. In both the cases, you need to see fundamentals of the company.