Analyzing Sales

 

On first thought it would seem that sales requires little analysis. When you buy a paperback book for $8.00 the bookstore has an $8.00 sale. Add up all of the sales the bookstore makes during the reporting period and you have sales. In fact, however, there are a number of factors to consider:

  1. How and when are revenues recognized?
  2. Are reimbursed expenses counted as revenue?
  3. Was the sale made for cash or barter?
  4. Are sales reported on a gross or net basis?
  5. Does the company offer financing to its customers?
  6. Did the company offer sales incentives to customers?
  7. Is the sale complete or can the customer refuse or return the product?
  8. Is there any growth in sales?
  9. Is the sales growth impacted by currency fluctuations?
  10. Is unit growth consistent with revenue growth?
  11. Are there seasonal or cyclical factors at play?

So on second thought it becomes clear that there are many issues to consider when looking at a company’s sales figures. Since sales is the top line, any distortions to the figure reported, whether intentional or unintentional, have a magnified impact on the bottom line. And since most investors look at the bottom line number as their basis for valuing a company’s stock, it is particularly important to make sure that the sales figure is reported correctly. Therefore, we will address each of the factors listed above over the next several Investing 101 series posts.

References:
Financial Statement Analysis : A Global Perspective

The Analysis and Use of Financial Statements (Analysis and Use of Financial Statements)

Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Second Edition

For more information, see all articles on: Financial Statement Analysis, Fundamental Analysis

See also:
  • Analyzing the Auditor’s Statement: Adverse Opinion
  • Analyzing the Auditor’s Statement: An Unqualified Opinion
  • Reading the Income Statement
  • Inventory Cycles in Business
  • Gross Profit Defined
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

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