Revenue and Earnings: Fundamentals Based on the Operating Statement

The operating statement provides the second area worth detailed analysis over several years. Just as you cannot make sound judgments about the current P/E ratio without studying the longer-term trend, you cannot truly appreciate the significance of the current revenue and earnings without seeing how the trend has moved over a decade.

Tracking revenue and earnings is not just a matter of making sure that the numbers rise every year. You look for true growth, meaning that the dollar value of revenues and the dollar value of net earnings both rise each year.
But you also want to see net profits maintained at a consistent or growing percentage of revenues. Even when the dollar value of earnings rises, if the percentage is declining, that is a negative sign. It probably means that costs and expenses are outpacing the growth in revenue, and that is never a positive trend.

Referring to the two previously cited companies as examples of the trend in P/E ratio, you can also track revenue and earnings trends over the same period. Figure below summarizes the General Mills (GIS) record of the operating results for a decade.

[caption id="attachment_12695" align="aligncenter" width="510"](GIS) Revenue and earnings, 10 years: General Mills (GIS).[/caption]

By Michael C. Thomsett
Michael Thomsett is a British-born American author who has written over 75 books covering investing, business and real estate topics.

Copyrighted 2020. Content published with author's permission.

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