Earnings Stability

Helps to forecast future earnings!



Earnings stability measures how consistent the earnings per share growth of a company is. It is a good value investing indicator.

The more stable the earnings per share growth of a company, the more accurately one can forecast future earnings, and to a lesser extent future P/E ratios.


How do I use it?

If a company with stable earnings growth has a current P/E ratio that is less than its historical average P/E, then this provides me with a strong indication to investigate further.

While historical performance is not a perfect guide to future performance, I can be more confident of future performance for those companies whose historical earnings growth is stable.

I look for companies whose stability is significantly greater than its sector and the market as a whole.

My online broker's site provides a stability figure for each company that uses historical and forecast earnings per share.

For example, a major retailer had, at the time of writing, a stability figure of 89.8% whereas its sector (companies trading in similar products) had a stability of 53.1% and the market as a whole was at 59.9%.

This says something about the ability to more accurately forecast future earnings for the company compared to its competitors.


Better Earnings Forecasts

Professor John Price, the principal of the Conscious Investor financial advisory company, argues that by taking into account earnings stability, earnings forecasts can be made with five-times or greater accuracy.

His website allows you to filter U.S., Canadian and Australian companies on their stability for free. Company financial data is updated daily.

The site allows investors to choose companies that have the highest stability in the growth rate of their earnings for the past five years.

It also displays the current price, the market capitalization and the historical growth rate of earnings for the companies with high stability of earnings.


In Summary ...

This earnings stability ratio is a good 'steady as she goes' indicator of company performance over time, and used in conjunction with other financial data, is a good value investing indicator.

It reduces the uncertainty in future earnings forecasts and so assists in reducing the risk in investment decision making - and reducing risk is what value investing is all about.

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