1. For
reviewing the income statement trend over 5 or 10 years.
i.
Are revenues rising or falling?
ii.
Are expenses staying in-line with revenues?
iii.
Are profits consistent or uneven?
iv.
Is there a cyclical pattern to earnings such as would
be the case with economically sensitive companies?
v.
Are profits growing?
vi.
Are there a lot of one-time charges or gains that
indicate that the company may be manufacturing or massaging the bottom line?
vii.
Are there a rising number of shares outstanding that
may indicate that excessive stock options are being issued to executives
diluting your share of corporate profits?
(Increasing shares may also indicate that the company is financing
itself through stock offerings rather than earnings.)
viii.
Are shares declining indicating that the company is
actively buying back its own shares?
(make sure that if the company says they are buying back shares in
shareholder communication or in the press that they do buy them back) Are shares falling year over year?
2. Ask
the following questions about the prospects on your list.
i.
What is the outlook for the pricing of the company’s
products? Can the company raise
prices? Each dollar of price increase
will increase pre-tax income by a dollar if costs do not increase.
ii.
Can the company sell more? If the company can do so without increasing
costs, every dollar will go to the bottom line. (increasing sales should not be
done through incentives or giveaways)
iii.
Can the company increase profits on existing sales?
1.
What is the gross profit margin as a percentage of
sales?
2.
How much is gross profit margin expected to increase or
decrease as a result in changes of price, mix of business or the specific costs
that make up the costs of goods sold?
3.
If it is not possible to sell more is it possible to
squeeze more profit out of what is already being sold?
4.
Can the company cut product costs by changing suppliers
or shipping methods?
5.
Can the company change its product mix to focus on more
profitable lines of business in order to raise its profit margin?
iv.
Can the company control expenses?
1.
What is the outlook for selling, general and administrative
costs margin as a percentage of sales?
Have there been any changes and if so, what are they?
2.
Is there anyway for the company to cut costs not
related to making the product?
3.
Are overhead, salaries and other employee expenses out
of line?
4.
Can the company close expensive or outdated production
facilities?
5.
Is a new technology available that will allow the
company to raise its overall profit margin?
6.
Can the company lay off employees to reduce overhead?
7.
Can it refinance debt and lower rates and let the savings
accrue to the bottom line?
v.
If the company does raise sales, how much of it will
fall to the bottom line?
vi.
Can the company remain as profitable as it used to be
or at least as profitable as its competitors?
vii.
Does the company have one-time expenses that will not
have to be paid in the future?
viii.
Does the company have unprofitable operations it can
shed?
ix.
Is the company comfortable with Wall Street earnings
estimates?
x.
How much can the company grow over the next 5 years?
1.
How will the growth be achieved? New markets?
New locations? Will it buy
companies to grow earnings?
2.
Will the growth come at the expense of profit margins
and return on equity (ROE)?
xi.
What will the company do with the excess cash generated
by the business?
1.
Increase dividends?
2.
Invest in new stores or factories?
3.
Acquire other companies?
4.
Buy back stock?
5.
What is the expected return of these investments? If they cannot invest this excess cash at
higher rates of return then a government bond or stock index fund or some other
stock you can purchase, they should not retain the earnings but pay the
earnings back to you as a dividend.
xii.
What does the company expect its competitors to do?
xiii.
How does the company compare financially to other
companies in the same business?
xiv.
What would the company be worth if it were to be
sold? (look for past examples of similar
companies that were sold or went private)
xv.
What are the insiders doing? (buying, selling – look for patterns)
