Reporting season is my favourite time of the financial year. We get a true insight into how our shares have performed – what they have done well and what needs a bit of improvement.
Expectations are different for every single company. Profit growth of 10% might beat expectations for one company but 20% growth could be a disappointment for another company.
However, regardless of how much the profit growth is, I'm still looking for the following things from all of my shares:
Revenue growth
I expect all of my shares to grow revenue, even it's just by 1%. To me, revenue growth signifies that a company is still relevant in this era. Even if the company only grows revenue by increasing prices that's good enough for me. It's very difficult to grow the profit if revenue isn't growing.
Margins increasing
Economies of scale is a great factor to help businesses grow profit quicker as revenues grow. The bigger the business gets the more profitable it should become. If margins are declining then that could be a sign that a business' economic moat is being eroded. Altium Limited (ASX: ALU) and BWX Limited (ASX: BWX) are two where I expect margins to increase.
Earnings per share (EPS) growth
Everything a business does should ultimately boost the earnings per share growth in the long-term. I'm happy for a business to invest for the long-term, even if that means short-term EPS are hurt, as long as EPS grows in the long run. Greencross Limited (ASX: GXL) and Ramsay Health Care Limited (ASX: RHC) are two businesses investing for long-term EPS growth.
Strengthening the balance sheet
Interest rates are beginning to rise around the world, including in Australia. I think a lot of businesses need to improve their gearing before the interest charge becomes too high and damaging for profit. The most indebted businesses would benefit the most by paying down some debt. Businesses like Healthscope Ltd (ASX: HSO) and Rural Funds Group (ASX: RFF) will need to be careful.
