Here we are again with another earnings season. The earnings are just starting to come in.
I have seen a couple of favorable comparisons so far, but I always like to check the earnings per share (EPS). Similar to buying a car, you have to look closely under the hood or you might buy a junker from a smooth salesman. For example, a car leaking oil will likely have had their engine compartment steamed cleaned, but they may not clean under the car where you can see the oil they missed.
I never pay much attention to the Non GAAP earnings. Those are usually biased to what management want investors to buy off on. Sometimes the news services report EPS from Non GAAP and that is why I ALWAYS go directly to the company's news release.
Next, I look at EPS on a diluted basis. Non-diluted basis doesn't take into consideration additional shares that could be converted. A favorable trend in earnings may result in the “rug being pulled out from under you” if it becomes advantageous for converting additional shares.
With all the buybacks these days, management uses this to goose EPS. EPS is simply net income divided by diluted shares outstanding. If the denominator goes down (diluted shares outstanding), the simple math is EPS goes up. Now this could be bad or good. It could be bad because the share prices management bought the shares at were high meaning they paid a lot for shares. If could be good if the stock price was down and management adeptly bought back shares at bargain prices.
I also look at dividing the current period’s net income by the diluted shares outstanding from the prior comparison period. This is sort of a control like they use in scientific experiments. It tells me how they are relatively doing on a per share basis with diluted shares held constant.
The major point is that investors have to look beyond the singular EPS number to get a flavor of the true significance of the earnings. The truth is in the numbers. You just have to get a shovel and start digging.
The truth will set you free.
