• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL
Help

Chapter 8. Earnings Tricks and Games: Ma... > Red Flag 12: When Earnings Growth Is...

Red Flag 12: When Earnings Growth Is a Lot Faster Than Sales Growth

When a company’s earnings are increasing at a much faster pace than its sales, especially over a long period, it can be a sign that a company is either using various accounting tricks or that it is recklessly slashing spending. It is fine if costs are being cut through increasing productivity and a leaner and meaner approach to suppliers. But, too often, companies may be cutting spending that is necessary for longer-term growth. “We like to see earnings grow at roughly the same pace as sales,” said short seller David Tice. “If earnings are growing a lot faster than sales, then it could be that the company is cutting back on discretionary expenditure, like selling expenses, research and development expenses, and advertising expenses. It will help earnings per share now but it will hurt it later.” In the next chapter, we look more closely at how revenue and costs can be manipulated and ways to spot companies that do it.


PREVIEW

                                                                          

Not a subscriber?

Start A Free Trial


  
  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint