While these outside information sources are useful, it is important to understand how the information service you are using derives its figures, especially for comparative purposes.
This is particularly important in the calculation of earnings per share, which is subject to some financial accounting manipulation. For instance, companies can have conservative accounting policies in which they depreciate assets relatively quickly, or take large allowances for bad debt, either of which leads to greater initial expense and consequently lower earnings.
The way the information service handles accounting differences can make a big difference. As an example, Value Line does not include non-recurring gains or losses in its calculations, but instead chooses to footnote those amounts. Standard & Poor's, on the other hand, chooses to include extraordinary items in its reports, which makes it possible for the two services to come up with different historical growth rates for the same company.
Dividends are subject to less accounting differences than earnings, but the information services may handle extraordinary dividends differently.
In comparing companies, the date of the fiscal year-end can also have an impact. The effect of fiscal year-end differences is sometimes magnified in times of economic turnaround or industry upheaval. Differences of only six months can have a major impact on the calculation of historical growth rates and ratios. The key is to know that such differences may exist, and to keep these in mind when comparing companies.
Because of these differences, it is probably best for beginners to stick to one information source when comparing companies.
Continue to Step 3 »
