It’s just math, right?
Whatever.com just produced $1.32 in earnings…one hundred thirty two cents of Wall Street lovin’ profit. How can there be a, uh...quality to that number? A number’s a number, right?
Well. Yes. But, rather, there are different qualities of earnings. What if we told you that 100 percent of whatever.com’s earnings came from ads it sold to 40,000 different buyers, because its website was just that popular? All of the growth came intrinsically, meaning that users just loved using it and nothing meaningful changed on their balance sheet other than that the cash account went up.
Okay. Very high quality earnings.
Really? Sure ‘bout that?
Hm…well what if we told you that 70% of their ad sales came from a subsidiary in China…and were all collected in RMB (the Chinese currency)? And that, in this quarter, the Chinese currency appreciated 38 percent. Essentially, all of their big growth came because the Chinese currency did well...not because their business did well.
So…wait. Had the Chinese currency just been flat, the company wouldn’t have earned anything close to $1.32…70 percent of the sales and almost 40 percent currency gain? It means that the company happened to have a lot of sales in a country with a fast appreciating currency; it wasn't necessarily a direct reflection that the company had high quality earnings .
Yes, it's great that they were in a hot market in a highly appreciating currency. But if the currency hadn’t gone up so much relative to the US dollar in which they report their earnings, the real earnings then would have been more like a dollar. Maybe less. So that’d be low quality earnings.
What about high quality earnings? Well, really simply...you said you’d sell 300 tractors this quarter. The Street thought you’d sell 310. You actually sold 320. You said margins would be 20 percent. The Street thought they’d be 22 percent. They actually were 25 percent. You said you’d generate $20 million in cash. The Street thought you’d generate 22. And you actually did generate 25.
Simple. You just did your core business…selling tractors…well. Quality earnings. Quality tractors.
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Finance: What are normalized earnings?5 Views
Finance allah shmoop what are normalized earnings All right this
is norm or it's supposed to be We just couldn't
get the licensing rights from him So this is our
public domain version of norm from cheers Sorry And this's
normal that's a bell curve Yeah you're in the ebola
abatement business Each year the government spends a few bucks
on you Just keep you alive Is a business in
case Well you know a few hundred million peoples faces
start melting off like you know that scene in indiana
jones you know the good ones so your earnings are
usually here and here and here and here a buck
a buck twelve twenty three twenty four years I'm like
that But then one year after miss malaria's high school
biology class takes a field trip to study monkeys bats
and beetle crap in caves in central ghana Well your
business picks up So this year when the gove is
having to spend a fortune on ebola abatement you were
nine dollars and forty two cents a share And since
world awareness has suddenly shot up the most popular yahoo
search term index that thing well next year you'll still
learn five seventeen to share even though most the ebola
is pretty much gone now But then things quiet down
in life goes back to normal where your earnings are
you know normal and you could plot some kind of
line through them And if someone asked you what normalized
earnings are in your little ebola abatement company well you
could say that your normalized earnings are in about a
buck twenty Well fortunately making out with the nigerian fruit
bat is not normal so you probably don't have to 00:01:40.539 --> [endTime] worry about contracting ebola Ooh
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