Earnings vs. revenues

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Earnings vs. revenues

Post by jwblue » Sat Jan 26, 2013 12:36 pm

There seems to be an emphasis for investors to focus on revenues for a company instead of earnings.

I never understood this.

It is easy to sell an item for a $1.00 that cost $1.00 to make. It seems to me that making a profit is what is important.
Is there some sort of assumption that costs of that item will fall in the future which would increase profits?

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Re: Earnings vs. revenues

Post by HueyLD » Sat Jan 26, 2013 12:48 pm

Because it is harder to fudge revenues.

A company may report earnings increase by cutting cost and deferring maintenance. However, without revenue-generating customers, the party will stop in due time. That's why both revenues and net earnings have to be evaluated to get a more complete picture of a company's ability to sustain its earnings.

Thank goodness for Boglehead style of investing, I no longer have to worry about analyzing the financial statements for individual companies.

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Re: Earnings vs. revenues

Post by NYBoglehead » Sat Jan 26, 2013 1:03 pm

^People care about revenues because growth in revenues is necessary for a growing economy. While we have heard tons of stories about "record earnings" these were largely achieved by reductions in the workforce and other cost-cutting measures, not "top line" growth in the number of sales.

While earnings are definitely important the growth/lack of growth in earnings is a good indicator of a company's strength.

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