Stocks often are judged by the company’s earnings per share. However, investors also should pay attention to the top line (total revenues). Indeed, the top line may actually tell you more about a company than its earnings, for several reasons:
* Declining inflation. Persistent inflation over the past few decades has caused investors to take steady revenue growth for granted. Now, inflation is low and price increases can’t be assumed. Thus, top-line growth reflects good management.
* Cost-cutting. Increased earnings may be due to decreased expenses. However, a company can only trim so many jobs and close so many offices. For true growth, revenues must increase.
Be careful to look behind the numbers at the quality of revenues. Artificially inflated sales can be a trap; getting to know a company’s revenue reporting techniques can help you avoid the next Enron.
