When we begin our analysis, it is important to start with the revenue and profit margin (RPM) trends. Understanding a company’s gross revenue, profit margins and return on equity and whether it is growing or shrinking is essential in any equity or corporate bond investment.
We look up the revenue and net income trends for at least the past two years. We dive further into the quarterly (at least past year) and annual reports (at least past three years). We examine the recent trends in both sets of figures, noting whether growth is choppy or consistent, or if there any major swings (such as more than 50% in one year) in either direction.
We review profit margins to see if they are generally rising, falling, or remaining the same. Depending on our clients needs and the market, we look for a company’s return on equity plus its profit margins be equal to 50 or greater – the higher the better.