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Classes-To-Go! 6A
When Earnings Grow Faster than Sales
Mary EnrightSioux Empire
Chapter Director
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BETTERINVESTING NATIONAL CONVENTION
Disclaimer• The information in this
presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced.
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BETTERINVESTING NATIONAL CONVENTION
Information ForEvaluating Growth
• Value Line Investment Survey
• Annual Report
• 10K
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BETTERINVESTING NATIONAL CONVENTION
Sales And EarningsGrowing At Different Rates
• Any difference can’t last forever
• They must settle into a state ofequilibrium
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BETTERINVESTING NATIONAL CONVENTION
Getting From Sales To EPS
(1) Sales or Revenues- Costs or Expenses
= Pre-tax Profit (PTP)
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BETTERINVESTING NATIONAL CONVENTION
Getting From Sales To EPS
(2) Pre-tax Profit (PTP)- Taxes Paid
= Earnings or Net Income
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BETTERINVESTING NATIONAL CONVENTION
Getting From Sales To EPS
(3) Earnings÷ Shares Outstanding
= Earnings Per Share (EPS)
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BETTERINVESTING NATIONAL CONVENTION
Getting From Sales To EPS
Sales or Revenues- Costs or Expenses= Pre-tax Profit (PTP)- Taxes Paid= Earnings or Net Income÷ Shares Outstanding= Earnings Per Share (EPS)
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BETTERINVESTING NATIONAL CONVENTION
Simplified “Income Statement” Sales
- Expenses
= Pre-tax Profits
- Taxes
÷ Number of Shares
=Earnings Per Share
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BETTERINVESTING NATIONAL CONVENTION
Explaining The Difference InGrowth Rates
Three Primary Causes:– Change in the expenses per
dollar of sales– Change in tax rates– Change in shares outstanding
We will look at each of these10
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BETTERINVESTING NATIONAL CONVENTION
Explaining The Difference InGrowth Rates
• Change in the expenses perdollar of sales
• Have profit margins changed?
• Are expenses going up fasteror slower than sales?
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BETTERINVESTING NATIONAL CONVENTION
Explaining The Difference InGrowth Rates
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BETTERINVESTING NATIONAL CONVENTION
Explaining The Difference InGrowth Rates
• Change in the tax rate
• Have tax rates changed?– These are also expenses, but not
necessarily under management’s control
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BETTERINVESTING NATIONAL CONVENTION
Explaining The Difference InGrowth Rates
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BETTERINVESTING NATIONAL CONVENTION
Explaining The Difference InGrowth Rates
• Change in shares outstanding
• Have shares outstanding changed?– Are company earnings spread over more
or fewer shares?
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BETTERINVESTING NATIONAL CONVENTION
Explaining The Difference InGrowth Rates
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BETTERINVESTING NATIONAL CONVENTION
Explaining The Difference inGrowth Rates
• Improving Profit Margin will contribute to Earnings Per Share growing faster than Sales.
• Tax rate decline also contributed to Earnings Per Share growing faster than Sales.
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BETTERINVESTING NATIONAL CONVENTION
Explaining The Difference inGrowth Rates
• Be sure to check shares outstanding• A sharp decline in shares outstanding in
2004 is followed by an increase in 2005 and then remaining level
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BETTERINVESTING NATIONAL CONVENTION
Difference In Growth Rates
• EPS growing faster than sales
– Check if profit margins are increasing
– Check if tax rates are decreasing
– Check if shares outstanding are decreasing
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BETTERINVESTING NATIONAL CONVENTION
Difference In Growth Rates
• EPS growing faster than sales– Cutting costs
•Can this go on forever?•There is a limit to how much you can
cut costs– Buying back Shares
•Can this go on forever?
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BETTERINVESTING NATIONAL CONVENTION
Questions?
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