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 retained earnings?26 Views
Finance allah shmoop what are retained earnings You know when
you eat really salty food and the next day you
have cankles it's all that water desperately trying Teo get
youto wiz out the loads of sodium chloride in your
body That's retained water well retained earnings and i'll sort
of work the same way you run a plastic cup
stamping business with catchy little phrases on the cubs Last
year you had a million bucks in sales and one
hundred grand in after tax earnings About eighty grand of
that earnings was in fact cash Why didn't you retain
in cash one hundred percent of your earnings What happened
to the twenty grand in cash there How did evaporate
Well you had to spend cash out of your earnings
on a cup plunging machine and then cost real cash
dough You'll amber ties that cost over time now and
get essentially a tax break because of it meaning you'll
show lesson earning so you'll pay less in taxes but
the cash won't change So this year's hundred grand was
a nice year but last year you had fifty grand
in cash profits and you had twenty grand in cash
Profits the year before then and before then you had
run it just cash flow break even for the previous
five years So it all looked like that So in
total you saved Or rather you retained cash earnings of
eighty plus fifty plus twenty or a sum total of
one hundred fifty grand That all now sits in your
b of a account doing a whole lot of nothing
of intern two percent a year for the privilege that
one hundred fifty grand that you have cumulatively retained Like
ankle's swelling is retained earnings which you will now use
to print more catchy titles in foreign languages Maybe don't
look up What those mean All right let's close the 00:01:49.043 --> [endTime] video now
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