Trend Analysis and Comparing Companies

    Download printable PDF

The standard method for reporting the financial performance of companies is on a total dollar basis. Looking at this raw data, however, it is sometimes difficult to discern trends in the company’s performance or to compare companies, especially those that differ significantly in size or sales. To aid in this process, Stock Investor Pro provides alternate means of examining financial statement data. For quarterly statistics, in addition to total dollars the program reports quarter-on-quarter percent change data. For annual figures, you are given per share data, annual percent change figures, and common-size financials. In this installment of Stock Investor News, we discuss quarterly statistics along with per share data. Next month, we will delve into annual percent change figures and common-size financial statements and examine how to use common-size financial statements to compare companies.

Stock Investor Pro

Quarter-On-Quarter Comparisons

The easiest way to identify company trends and their magnitude is with percent change information. Quarterly percent change data is presented in Stock Investor Pro on a same-quarter basis, meaning the percentage change reported is the change between that quarter and the same quarter a year ago. This is the manner in which all quarterly comparisons should be made, as this will eliminate the seasonal fluctuations many companies experience. To locate the quarter-on-quarter data for a company, go to the Fin - Qtr tab in the Stock Notebook and then click on the Percent Change One Year Ago sub-tab.

As an example, consider Wal-Mart Stores Inc. (WMT), the world’s largest discount retailer. As is the case for many retailers, Wal-Mart sees a rise in revenues (sales) for the quarter that includes the Christmas shopping season. Looking at Wal-Mart’s quarterly income statement, their revenues rise for the quarters ending in January, while there is typically a drop off in revenues in the following quarter. Given the seasonality of Wal-Mart’s business, it is impossible to say whether it is good that sales rose from $113.9 billion for the quarter ending October 31, 2012, to $127.9 billion for the quarter ending January 31, 2013, or that it is bad that sales dropped to $114.2 billion for the quarter ending April 30, 2013.

In order to make meaningful comparisons, you must compare a quarter to its prior-year counterpart—the quarter ending January 31, 2012. Looking at the quarterly percent change data for Wal-Mart, you can see that sales increased 3.9% for the quarter ending January 31, 2013, over the same quarter one year ago.

Per Share Comparison

The Fin - Ann’l tab gives you the option of looking at the data on a total dollar basis as well as on a per share basis, a percentage change year-to-year basis and common-size financials basis.

Since share prices are presented on a per share basis, it is useful to analyze a company’s financial statements in a similar manner. The calculation is made by taking a financial statement line item, such as sales, and dividing it by the average number of shares outstanding for the same period. Per share analysis allows you to equate the price of a common share of stock to a tangible element of a company such as earnings, sales or cash. By issuing or repurchasing shares of stock, companies can influence the existing value of the stock. Typically, when a company announces that it will issue additional stock, the price of existing shares reflects, among other things, the dilution the new shares will create. A larger number of shares will be divided against the same level of current earnings or company assets. Conversely, when a company announces a share repurchase initiative, stock prices tend to rise, all else equal. This is because a smaller number of shares will be divided against the company’s earnings. In essence, shareholders are gaining a larger piece of the pie. These are general rules of thumb. Ultimately, the long-term effect of these initiatives depends on how effectively the company utilizes the funds generated by a secondary stock offering, or what opportunities were lost by repurchasing shares instead of investing in future endeavors.

Intel Corporation (INTC), a leading semiconductor chip maker, provides an example of how a change in the number of shares outstanding can impact a company’s per share numbers. Looking at the annual total income statement figures for Intel, you can see that the average number of shares outstand has been dropping since 2006. Over the last two years (2011 and 2012), the average shares outstanding dropped by some 300 million shares per year. In 2010, the firm realized 11.5 billion in net income and in 2012, the firm realized 11.0 billion in net income. From 2010 to 2012, net income actually dropped by 4.3%. However, over the same time frame, basic earnings rose from $2.06 per share to $2.20 per share, an increase of 6.8%.

This illustrates how decreasing the number of shares outstanding boosts per share numbers—most importantly, earnings per share. Examples such as this show how important it is to identify the sources of increases (and decreases) in earnings per share, as the company is not usually going to reveal this. Discoveries such as this bolster the argument that thorough analysis of a company is essential before you commit investment dollars.