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