It’s Earnings That Count is a book about looking beyond the raw numbers in the financial statements to find the great investment opportunities. The book is written by Hewitt Heiserman, Jr. The book is in its first edition and was published in 2005. The book is 224 pages long.
The author of It’s Earnings That Count
Hewitt Heiserman, Jr. is an expert quantitative analyst and has worked with firms such as Fidelity Investments. He is a columnist at TheStreet.com
Summary of It’s Earnings That Count
It’s Earnings That Count consists of 14 chapters
It’s Earnings That Count is a book about a tool based on the value investment philosophy. The author’s idea is that the raw earnings do not show the full history of the company. Therefore he introduces two numbers called the “defensive earnings” and the “enterprising earnings”.
The “defensive earnings” is an earnings number that takes into account the effect of investments in fixed assets and working capital. It is a sort of “free cash flow” measurement. If it is consistently lower than the reported earnings (or even negative) it shows that the company is not self-sufficient and could face troubles down the road.
The “enterprising earnings” is an earnings number that builds on the Economic Value Added (EVA) model. It is calculated by taking the raw earnings and charging it by an amount based on the equity in the business. If the “enterprising earnings” are far below the reported numbers (or negative) it means that the company is creating insufficient profit from the capital employed.
If both are positive, rising over the years and close to the reported earnings you might be looking at a good investment. The book contains short chapters on topics such as valuation and management evaluation. These show you what to do after you have found a promising investment using the “Earnings Power”-tool.
My rating of It’s Earnings That Count
I think that It’s Earnings That Count is a great book. The “Earnings Power”-tool is a useful and can easily be incorporated into your own investment process. I use it for sorting out my investment ideas (once you get used to it you can do the calculations in no time) and as a coal mine canary. I know that if the raw earnings look great but the enterprising- and defensive earnings look bad I might be looking at a trap or a fraud such as Enron and can steer clear of it or investigate it further.
My only point of critique would be that it tries to do it all in just 224 pages. Besides the “Earnings Power”-tool it scratches the surface of a wide variety of topics from investment checklists to valuation and management evaluation. My advice to you is this: Read the sections on the topics not related to the “Earnings Power”-tool, understand them and then go buy a good book specifically about the topic as a supplement. Investment Valuation would be a good start for valuation and Common Stocks and Uncommon Profits for management evaluation.
All in all, I highly recommend reading It’s Earnings That Count but do supplement the shorter chapters with books specifically aimed at the topics
- Interesting way to look at earnings
- Great toolbox
- Builds on the value investing framework
- The focus is on practical application
- Touches a wide range of topics such as management evaluation and valuation but lacks in-depth information
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