Key Fundamentals: Sales, Margins, Return On Equity
Sales growth, profit margins and return on equity are
vitally important in evaluating a company's health.
This lesson explains the significance of these financial
gauges and how to identify the companies with best numbers.
It All Starts With Sales
Sales figures are a key measure of a company's strength
-- or lack of it. Perhaps no other piece of financial
information reflects growth better than sales: the money
that comes into a company from products sold or services
rendered. If a company is run efficiently, sales growth
essentially drives earnings growth. Companies basically
have two ways to increase earnings. They either increase
sales, reduce expenses or ideally do both. Although
a well-managed company controls expenses, healthy sales
are the main engine for growth.
When you search for the best stocks, you want a company
to have strong sales growth to support its earnings
growth. Think of sales growth as the foundation under
your house: if it is loose, it's not as stable as one
with all the structural elements in place. When you
see a company increasing its sales, it's telling you
its business is drawing larger demand and is structurally
sound and prepared to expand and generate the earnings
capable of boosting its stock price.
Demand is driven by a number of factors, including
larger numbers of customers, customers increasing their
purchase volume, introduction of new products, expansion
into new markets and the improvement of existing products.
The top-performing companies show consistent double-
or triple-digit sales growth. It's even better when
the percentage growth rate increases quarter after quarter.
Such acceleration is the hallmark of quality growth
companies. They reflect a well-managed organization.
Take a look at some companies that have done just that:
Nokia began a 630% jump from March 1998 through December
1999 and continued rising into 2000 after
the wireless-phone maker reported sales gains of 9%,
12% and 19% in the three quarters leading up to the
big move. Earnings were rising sharply during this
Home Depot made a 698% move from June 1982 to June
1983. Its sales grew 104%, 158%, 191% and 220% respectively
over the four quarters leading up to this major stock-price
EMC, the maker of memory chips, rose 512% from September
1992 to October 1993 as sales in the four quarters
before this huge move rose 30%, 46%, 54% and a hefty
How high should sales growth be? The three
most recent quarters should each have strong sales growth
of at least 25% compared to their year earlier quarters.
Otherwise, sales growth should be accelerating in the
last three consecutive quarters.
Investor's Business Daily's earnings reports include
the sales figures for every company releasing its quarterly
results. Up and down arrows show if sales are higher
or lower than the previous quarter.