Getting the Market Right: Eric Fry on Why You Must Look at Gross Revenues

Steve McDonald
by Steve McDonald


Steve McDonald: Our guest today is Eric Fry - one of the best analysts I know in the business. He’s here to talk about revenues and why he considers them one of the most important factors in picking a stock. Welcome, Eric!

Eric Fry: It’s great to be here, Steve.

SM: It’s nice to have you. First up, just for people who might be new to this - I know most people understand what revenues are.

What are revenues? How are they generated, how are they measured, that sort of thing?

EF: Alright, well in stock market investing, most people talk about earnings, earnings per share, that kind of stuff. They don’t talk about revenues very much, but revenues are literally the dollars that come in the door.

Any mom-and-pop knows what that means. The big companies, they know what it means, too, but investors tend to overlook that.

The reason it matters is there’s a very simple principle that relates to the health of a company. And that is “You cannot grow by shrinking.” So if your revenues - your sales, cash coming in the door - are declining, you can’t grow.

And despite that fact, a lot of companies have - through accounting chicanery - figured out ways to show rising earnings even while their sales are falling. And eventually, that will come around and bite them in the rear end, and the earnings will fall.

But if you’re watching revenue growth, you’re watching sales, it’s very hard to be fooled by the accounting.

SM: Okay, now how do our Members use revenues?

I mean, you look at a balance sheet and it says “$5 billion in revenues.” What does that mean to them? Is there some comparative level that they have to look at?

EF: Well, revenues are actually the easiest thing to analyze on an income statement. And so it really is sort of “analysis for dummies.”

It’s the top line - it’s called the top line. You look at the top line on an income statement, and it’s “sales.” It’s the total sales that the company generated in that quarter or that year or whatever.

And what you’re interested in seeing is the trend. Are sales going up, or are they going down?

And you can look at a quarterly sales result and compare it with the prior year’s quarter - the same, so first quarter vs. first quarter, or year vs. year - and you can look and say, “Well what’s happening here? Sales going up? Sales going down?”

So it is really the easiest analysis. Before you get into all the other stuff - the depreciation, the interest expense, the taxes, blah blah blah, sales are right at the top of the income statement.

SM: Now, where can our Members find this, other than on an income statement? Is there an easy source of the information?

EF: I mean, actually, when you look for the details of an income statement, they’re typically somewhat hard to find. You can go to any company’s website and pull up the financials.

But when it comes to revenues, those are generally carried on all of the websites - your Yahoo Finance or whatever - you can just go click on that company and get basic information. And that basic information will be displayed, usually, over the last five years.

SM: Does it make any difference if they use revenues per share or gross revenues?

EF: Yes. Use gross revenues.

SM: Okay.

EF: There are two basic ways that companies “massage the numbers,” as it’s called, and one of them is at the net income level - I touched on that a moment ago.

The other is by buying back shares. A lot of times they’ll borrow money to buy back and retire shares. So if you look at revenues per share, you might get a skewed result.

What we want to see is what is the company - in aggregate - doing? Is it getting more prosperous or less prosperous based on its total sales?

SM: Perfect. Eric, thank you so much for your expertise. It’s always such a pleasure to have you on.

EF: Thanks, Steve.

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