Comfort Zone Investing: What to look for in earnings season

Revenues: Again, you'd like to see them increasing by natural causes. Look for more widget sales, etc.. These sales show a growth in market share, always a good sign, except if attained by lower pricing without commensurate lower costs. Anyone can buy market share with lower prices, but only profit growing companies do it when their costs are also going lower. So scrutinize how sales grew, not just that they grew. And, again, you'd like to see earnings growing faster than sales.

If sales are growing much faster than earnings or if sales are growing and earnings are decreasing, it usually means the company's pricing is too low. If sales increase and profits go down, that means instead of efficiencies from higher sales, there is inefficiency, created by selling prices that are too low or material costs that are increasing at the margin so new sales actually cost the company money.

Another number to check: outstanding shares. If they're going down, it means the company is buying back stock. If they're increasing, it means more stock was sold during the quarter, either to management or in a secondary offering. Ever increasing shares can be dilutive to earnings and that's always a bad thing unless earnings are growing faster than the new shares are being sold.

These three numbers are usually on every earnings release. Or you can find them at the company's SEC filings at www.sec.gov (look for the 10Q report for the quarterly and the 10K report for the annual). Also, in these reports you'll find the Management Analysis and Discussion which describes the business environment and how management is managing the business. That's always a helpful read.

When your stock publishes its earnings, look deeper than the small report or the headlines. Dig a little further and find out how the earnings were made, how well sales are doing, and what management thinks about ongoing business. Then you can make a better decision about buying, selling or holding your stock.