The single most important bit of information one should glean from the income statement is the quality of a firm's earnings. It's not just whether profits are rising or falling; it's how they're rising or falling. For instance, if net income is soaring but cash flow isn't, you should be concerned. Before IBM's stock collapsed in the early 1990s, its former chief independent auditor, Donald Chandler, had accused Big Blue of pumping up net income by logging orders as sales before they were actually recognized. Although the maneuver is legal, it's risky; some computer manufacturers prefer the more conservative strategy of waiting until payment has been made. For a description of how
a company records sales, check the Revenue Recognition section of the footnotes that accompany the financial statements. If a firm is posting premature revenue, and sales don't materialize, it will probably have to write off the loss, and that will hurt the stock
"cpq revenues are in question" as opposed to earnings
sn |
