Does net income statistics prove a company's future earning potential?

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Answered by: Christopher , An Expert in the Financial Market Facts Category
The Bottom Line

Far too many factors can manipulate a company’s net income statistics, we must take this into account before deciding to take net income figures as a determining factor of a company’s future income possibilities. Net income is merely a current snapshot of how well a company is doing in the present moment, but it is not indicative of its future income and financial success.



There are many ways for a company to manipulate their net income. Such techniques may be used for a number of factors which may not be professional but they are tactics used by companies in order to survive the ups and downs of the modern market. These tactics include manipulating statistics of cash infusions, non-factual financial statements, capital assets, debt carried, cash in hand, sales trends and so forth.

Furthermore standalone numbers can be deceiving, taking this into account there are verified ways of making an informed prediction about a company’s future income. Some of the methods include:



Following consensus earnings:

These net income statistics are far from perfect, but in our modern market they are an important factor that many investors keep an eye on, they play an important role in making a correct valuation for a company’s stock.

Following earning trends:

Most investors rely on a company’s earnings trends in order to make an informed decision of whether the company has a high income potential. The basic method of measuring these earnings are in “earnings per share” this particular metric is calculated as the company’s net income found on its income statements, minus their dividends (on preferred stock), divided by the number of outstanding shares. (McClure, 2014)

Following analysts’ forecasts:

Many analysts’ will incorporate market research reports into their investigations in order to get a sense of the company’s growth trends. To obtain an in-depth report they will not only look at statistics, they also speak directly to customers, the company’s suppliers and direct competitors. They input all this information into their model and predict revenues in an informed manner. (McClure, 2014)

Footlocker’s tactic shows that by separating their reported losses on the discontinued components of its operations allows the users to assess the permanent component of Foot Locker’s earnings. In doing so, reader will see that the company actually has improved their performance of the continuing part of its operations, thereby suggesting an upward trend in their future earnings. While this may not happen, it is definitely a better predictor of their future earnings than one based on net income (bottom line)

Taking all this information into account, a consensus estimate is very powerful in determining stock prices and future net income. If a company’s consensus estimates are exceeded, it will be rewarded with a higher stock price, in contrast if the company is unable to meet their consensus estimates, its share prices will plummet. I can conclude that consensus earnings are one of the most important factor which drives share-price performance in the short term and is way more effective in income prediction than current bottom line numbers.

References

McClure, B. (2014, January 10). Investopedia. Retrieved from Investopedia: http://www.investopedia.com/articles/stocks/06/earningsforecasts.asp

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