Quality Earnings or Quantity Earnings?

by Minority Fortune

portraitbwIt can be tempting to rush for the largest earning investments of the moment. However, you may want to re-evaluate that decision in favor of long-term quality profits. Afterall, how did Warren Buffett become a mega-millionaire? He invested and held onto profitable companies of quality. Investopedia also states that quality investments usually have a better P/E ratio (price to earnings) over time than that of those with short-term large profits. Therefore, when you have found a quality investment, it’s important to hold onto it.

How to Detect a Company of Quality?

Investopedia notes that you should ask yourself 3 questions:

  1. Are the company’s earnings repeatable?
  2. Are they controllable?
  3. Are the earnings bankable?

Several keys to repeatable earnings are money management and constant sales. If earnings are the result of a one-time action such as layoffs, selling assets, or media hype, then these earnings will not be consistent, and it is wise to not invest in them.

Controlled earnings is also important. The investment in question should have a high concentration of controllable factors. For example, if a real estate holding company is experiencing profit losses, it may be due to the market downturn, but an innovative company should be diversifying and expanding. Additionally, they should have records of a good leadership team and good practices.

Keep in mind that companies are allowed to record anticipated profits, despite the fact that its earnings aren’t guaranteed. Common accounting practices allow for companies to “jump the gun” and use anticipated earnings from loans. Thus, it’s important to be keen towards ballooning increases.

Final word to the wise: Earning increases should never be out of luck, but out of controllable, profitable actions. Quality rules!

Bookmark and Share

Comments on this entry are closed.