Bottom of the Barrel: A Small-Cap Earnings Checklist
As the earnings parade begins, I've received some questions about the qualitative side of earnings for small-cap companies, like those in the Bottom of the Barrel portfolio. Numbers are key, but so is what management says about the earnings and the future. In fact, many times -- especially for small-caps with short earnings histories or even histories of losses -- the "softer side" of the quarterly report is just as important when assessing a company's future.
With that in mind, here's a quick checklist of items I focus on when listening to management discuss quarterly and annual results.
Examine the quality of earnings: Let's start with the obvious. We want earnings that are easy to understand and repeatable. However, I'm also always looking for good disclosure -- complete as well as straightforward. The financial statements in the earnings release and the 10-Q, when filed, should be readable by the average shareholder, and explanations should be clear and concise.I grow suspicious of earnings reports that are too complex or so full of minutiae that I end up more confused after reading them. For example, the Berkshire Hathaway (BRK.A) annual report is an example of simplicity. It is long and detailed, but when I'm done reading it, I have a pretty good feel for the business. Every company -- especially small-caps that are looking for investor sponsorship -- should aspire to be like Warren Buffett, at least in this regard. Check out the competition: Even in a tough economy, there are winners and losers. A classic example of that is Roadway (ROAD). When I originally
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