Earnings growth....long term, is the rest just all noise?
So often when people analyze financial statements and earning reports, there are many things that are looked at. ROIC to see how well the company is employing capital. Debt ratios to see liquidity. Margins to see how the company would be able to handle a recession or inflation.Organic growth, book value, etc. Then there are things besides the statements themselves, such as "I have used their product and it is fantastic". Also, things like "the CEO pays himself too much and uses too much company money to buy stupid things like private jets, etc." My question is, long term, why does anything besides earning growth matter?
Lets look at the things I mentioned individually
ROIC- well if a misuse of capital leads to slower earnings growth, then just look at the earnings growth.
Margins- if a company was long term able to maintain a small profit margin and still grows, what does the margin matter? If the company has survived recession and inflationary times with a low margin, then the fear should be taken away that low margins could spell trouble.
Debt ratios- if a company has a lot of debt and always has but still has managed to grow earnings with that, why does it matter how much debt they have? They clearly are able to manage it without negatively affecting them.
Book value- why does the book value matter? All I care about is how much the company is paying me. I don't cae if the company has a book value of zero, so long as they are able to keep earning me more and more money.
Organic growth- why do I care where the growth is coming from? As long as the earnings keep growing, and I have a stake of those earnings, I don't care if it is organic or inorganic...just keep paying me more.
Fantastic product- If the product is fantastic, then a lot of people will buy it, so it will be reflected in the earnings. If the product is terrible, then the product won't sell and it will be reflected in earnings. If the opposite is true, maybe your definition of terrible or fantastic is not the same as other consumers.
Corrupt management- if they are able to waste a ton of company money and STILL produce great earnings growth, then obviously their corruption is not affecting my bottom line.
So what I am trying to say, is that I DO BELIEVE that in order to have long term earnings growth, you need good management, you need a good product, you need organic growth, you need manageable debt, you need high margins, you need high ROIC, (I still think book value is irrelevant). But if you HAVE all of those things, then you should also have good earnings growth. And if you don't have all of those things, you probably wont have good earnings growth. So why not just skip all that and look at long term earnings growth? Unless you suspect fraud, which is a completely different subject. If my ownership in a company is my stake on earnings, then just increase my earnings constantly.....all the rest is just noise.
I am not saying I am right or wrong, but in my head I can't see why the rest matters. I get it for a new company that has not been through recession or high inflation....you maybe use those metrics to determine how they would be able to handle it. But one that has been around through many types of economic situations and just keeps growing earnings, does the rest matter?
Thanks in advance for the replies.