How to navigate falling profits

falling profits
Why i’m taking the 2020 falling profits with a pinch of reality.

2020 results are starting to come through for the companies on my watchlist and many of them will have seen falling profits against the previous year.

So how do we know whether these falls in numbers are something to worry about?

Well, for me, I prefer to take a wider picture analysis on the matter and so here are a few areas one can focus on to give yourself a wider viewpoint of the company and what’s going on. 

Retained Earnings

I care about retained earnings. I want to see that the company has ample funds tucked away for future growth. They will only have a large pot of retained cash if the last decade has been profitable enough to build such a pot. Therefore a strong retained earnings reflect a positive future over the next 10 years, regardless of the level of profit made in 2020 if any.

Company Equity

Ok, so the revenue may have dropped in 2020. Therefore profits will probably also fall. But what has the company equity been doing? Equity is simply the total of all the company assets, minus the total of the companies liabilities. In order words, it’s the companies net worth. Has it been growing? Whilst cash and profitability are crucial in identifying growth companies, we can look at whether the company is growing in other areas. Especially in a year when revenues are down due to matters beyond their control. Such as company assets and reductions in liabilities. These are still signs of a company making steps forwards and when the revenue and profit come back to original levels they’ll be in an even stronger position.

10 Year Trends

2020 is a write-off year for many businesses. They were simply unable to do their thing due to matters not of their making. I place significant value on what that company has been doing over the last 10 years. Until 2020 were they growing steadily each year? A decade is a long time. It’s therefore unlikely to be a fluke or an accident that a company can grow consistently over 10 years.

They are likely to have some form of competitive advantage that allows them to grow so well. Whilst the world around them has changed, the same people are behind the businesses. I would far prefer to place my capital in a business that has a decade long history of growth leading up the 2020 crash as opposed to one that didn’t. The odds are high that upon return to normality (whatever that may look like) many of these companies will find ways to shine yet again.

I am fully expecting some poorer results coming through this year. But these will not concern me. I will look deeper into these companies to ascertain whether they have lost their way or are simply another year away from bouncing back and continuing their growth.

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About Chris Chillingworth

Self confessed lover of racing, american football and whiskey. Trader and Investor since 2011. Chris has now coached over +1500 traders using his mechanical systematic trading strategies and now also runs a members only watchlist of FTSE stocks.

View all posts by Chris Chillingworth

2 Comments on “How to navigate falling profits”

  1. Dear Chris,
    I have enjoyed learning from the Spread Bet Beginner End of Day trading course which I bought from you a few years ago. I am very disappointed to find that your spread bet beginner website appears to have been taken down, meaning that I cannot at present access the course. Please can you advise me of when I can expect to have access to the course again?
    Yours sincerely,
    Paul Jennison

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