Quality of Earnings

Physician's Money Digest, June30 2004, Volume 11, Issue 12

Every 3 months, the stock marketbraces for some wild trading days asinvestors scour quarterly earnings reportsfor hints, both positive and negative,that offer some clue about the economy'sdirection. What many investorsdon't realize, however, is that the qualityof a company's earnings counts farmore toward future stock performancethan the raw numbers themselves. Overthe past 5 years, companies with topqualityearnings have done 4 times betterthan the S&P 500 index. One wayto measure quality is to compare operatingearnings with total profits, whichcan include special charges like restructuring.The two numbers should be reasonablyclose; if they're not, be skepticalabout the earnings quality. Get yourfacts from the company's 10-K filingwith the SEC (www.sec.gov).