Click here to Login

Should "Earnings Growth" be used as a trading criterion?

Updated on 2012-09-15 by Guest

How do you know if a company is a good company? That famous analyst and that famous trader usually tell us to see the balance sheet, income statement, and also cash flow statement. But hey, after skimming through all of them, we start throwing tantrum because we are stuck to the ratios, ratios, ratios and end up not taking decision at all.

If you look carefully to the ratios and everything, you might realize most of the ratio derived from taking earnings, asset, and liabilities into calculation. In this article, we want to discuss if earnings growth should be used as trading criterion, in the process we will use 3 companies and that is McDonald (MCD) Coca Cola (KO), and Gold Corps (GG). In the table below you can see the earnings, earnings growth, also Stock prices and stock growth annually.

Chart of Earnings and stock growth for MCD (top left), KO (top right), GG (Bottom left)

Looking at the chart, we can see at MCD chart earnings and stock growth moving in harmony until year 5 (2007) where the earnings growth was moving down, but stock price was not moving really much and then at year 6 (2008) the earnings growth was moving up drastically but stock growth was moving down sharply. This tell us that earnings growth sometimes can go in line with stock growth but sometime it can move in opposite direction. If we look again to the KO and GG chart, it is hard to see the pattern, but for KO it seems stock growth movement mirror the earnings growth movement, as for GG I would better look at the table where I can see big inconsistencies where the earnings growth movement goes up and down ignoring the stock growth movement. Based on this graphic, Im sure it is not enough to get any conclusion.

To get clearer picture, I have prepared another way to analyze if the earnings growth is in line with the stock growth. Here is the table that shows total earnings growth and stock growth over 10 years.

When I look to this table, I can say, everyone who bought MCD at 2002 and kept it until last year can be happy because the earnings growth actually was lower than the increase in stock price. Looking at KO the case is still acceptable although earnings growth at 115.33% the stock only grow at 59.60%, but after taking glance at GG, Id say this company is surely undervalued. The earnings growth is 2764.11% but the stock growth is only 247.88% or one tenth of its real growth.

Our conclusion is that earnings growth cannot be used as standalone trading criterion after looking at the wide variable of result in MCD, KO and GG. Id say you would need to combine it with another filter such as revenue growth, sales growth, debt growth, short term liabilities, and long term liabilities. After making analysis using the entire filter, of course there is no guarantee your trades are going to be successful but making the analysis can help you get to know how each company perform.

comments powered by Disqus
Users Blog
Recent Posts

Types of Coupon Swap Futures
Posted 4047 days ago

How to Manage Capital Effectively?
Posted 4047 days ago

Trading With E-Mini Index Futures
Posted 4053 days ago

Impact of Economy on Stock Market
Posted 4064 days ago

A Primer on Day Trading Strategies
Posted 4190 days ago

A Closer Look at Insider Trading
Posted 4239 days ago

Seasonality in the Stock Market
Posted 4268 days ago

An Introduction to Paper Trading
Posted 4273 days ago

A Primer on ETF Trading
Posted 4281 days ago

Is it too late to buy AAPL?
Posted 4281 days ago

Previous Posts

More Posts


Create an account
Affiliate Program
Contact Us
Trading Forum
How-to Lessons
About Us
Terms of Use

Copyright 2024
Social Media
Follow us on Facebook
Twitter Follow us on Twitter
Follow us on Google+
RSS Trading Items

Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.