Quality of Earnings

Rating:
Summary: A stock owner & short seller's manual
Review: "Quality of Earnings" takes a vital approach toearnings analysis--looking beyond raw earnings as spun by companymanagement for "the street". O'Glove covers basics (Chapter1: "don't trust your [sell-side] analyst"), and goes on toincredibly important basics that most individual investors are notexposed to through CNBC and other mass media outlets (includingsell-side analysts' reports). Example: tracking inventory build-up andaccounts receivable levels can make you a lot of money(short-selling--note: this is a very risky practice), or alternatelysave your rear end (if "long-only").

"Shareholderreporting versus tax reporting," has its own chapter--as itshould. I would pay 10 times the price of the book just for thischapter, as the concept is unique as far as I've read.

The CFRA... and various other firms use the same simple concepts in this bookto advise their giant money-manager clients about the quality ofvarious public companies' earnings. Money managers pay many thousandsof dollars a year for research based on the principles offered in"Quality of earnings".

A warning: reading this bookcoupled with listening to public companies' management may lead you toshort selling; if you remain "long only", this book maymerely save your rear end.

"Quality of Earnings" is aimedat those who are willing to devote a little time to research on whatthey own; there are no hard & fast rules in here, just businesscommon sense and insight honed through years of work andobservation.

This book and Schilit's "FinancialShenanigans" remain very close to my heart.

Rating:
Summary: Still worth reading
Review: 17 years later and many things have changed. The desire of investors to accurately gauge the stability of the companies in their portfolios remains the same. The incentive of management with stock options to hide the true nature of what the reality of what the company's earnings have been remains strong. Some of the techniques mentioned will be hard to use when companies employ SPEs to hide their true indebtedness and derivative positions mask the Value at Risk. However, many of the technique still have value. The analysis of receivables and inventories can provide insight into the immediate future of the company. The techniques that have lost their clear edge are the debt and write-off analysis. Write-offs are now required by GAAP (although the "big bath" write-offs are still "non-recurring") and SPEs or variable interest entities can obscure debt. It is fascinating in light of Enron, WorldCom, Qwest, Tyco, and Adelphia the stories of companies in the 70s and 80s that were attempting to do the same thing (though often without the fraud). How little man changes through the ages.

Rating:
Summary: Excellent insight to what annual reports don't say
Review: As a novice in the world of wall street, I found this book to be very informative. The differences among "generally acceptable accounting principles" and how they alter the bottom line was a real eye opener for me. The style is breezy and clears up fogs of confusion. The section on dividends is interesting in that the author upholds reasons for companies NOT TO PAY DIVIDENDS. I would like to ask the author about this, since with dividends,an investor gets $ & keeps the stock, while one can't benefit materially from a price increase without selling the stock. Had he explained this, the book would have rated five stars! I hope another volume is in the works...I want to read more like this.

Rating:
Summary: Excellent to learn financial analysis
Review: I got a lot out of this book. It has helped me a lot in my personal schooling of fundamental analysis. It is easily understood and comprehended by most anybody of average intelligence and belongs on every investor/traders bookshelf. You can tell that Thornton L. O'Glove knows his stuff and I only wish that he was still doing his Quality Of Earnings Report. I have owned it for a little over a month as of this review and have read it three times now getting more and more out of it every time. I obviously love it.

Happy Trading,
David Taggart

Rating:
Summary: Indespensible for fundamental analysis
Review: I got a lot out of this book. It has helped me a lot in my personal schooling of fundamental analysis. It is easily understood and comprehended by most anybody of average intelligence and belongs on every investor/traders bookshelf. You can tell that Thornton L. O'Glove knows his stuff and I only wish that he was still doing his Quality Of Earnings Report. I have owned it for a little over a month as of this review and have read it three times now getting more and more out of it every time. I obviously love it.

Happy Trading,
David Taggart

Rating:
Summary: Financial Rapport
Review: Investors who want to survive need to avoid torpedo stocks - the one's you don't see coming to blow a hole in your portfolio. This requires arming yourself with a healthy skepticism. Your stock analyst may be under pressure not to disrupt investment banking deals with negative reports. The auditor's independent review may be compromised by a desire to secure "fat fees" for a host of additional advisory services. Bottom line: Investors need to trust in their own abilities and do the job of reading corporate reports themselves. Read the annual report and more detailed SEC required 10-K filing. This is the simple message of QUALITY OF EARNINGS. Interpreting trends in accounts receivable and inventory levels from publicly available reports are useful tools to spot problems before they impact a stock's price. This is the author's "most important" chapter and it is as good a discussion as I have seen on the subject. The importance of understanding accounting practice changes and their immediate impact on how earnings are reported is another important matter that gets attention here. We also see why "big bath" restructuring charges that lower the bar for short term earnings growth expectations have become a predictable consequence of corporate acquisitions and CEO transitions. Much of this material will be familiar to readers of more current books on the topic, but O'glove's clear explanations and use of the numbers to support his conclusions are instructive. Because this book was written in 1987 the majority of examples used are quaint at best (e.g., Church's Fried Chicken, Coleco, Adademy Insurance Group, etc.). On the other hand, describing accounting changes at IBM or GE's managed use of tax losses through its Credit Corporation unit (GECC) may resonate rather differently with today's wary investor. A chapter dealing with dividends, the "tender trap", reflects recent, not current, thinking. O'glove's position is that "minimal or no dividends" is the best corporate policy. It is a fair discussion. This has been a general consensus for years because of the issues of double taxation and a conviction that capital can be more efficiently employed in a company's core business development. Currently, in the throes of a bear stock market, investors have sought dividend bearing stocks to hedge market volatility, as a tangible sign of legitimate profits (showmethemoney) when accounting scandals are discovered, and more broadly as way of supplementing retirement income. Preferences change, but one thing is certain. The issue of transparency in the markets is critical to assessing value. This book is an excellent introduction to the topic.

Rating:
Summary: Middle Markets
Review: Long overdue is a middle market with different rules than those by which the traditional markets must be rated in terms of earnings, and standards, to prevent the wholesale financial shennanigans that took place during the late 90's as VC's funded IPO's and oversold them to the institutional markets. There has always been a very healthy start up market in the U.S. that has yet to be tapped for its vitality, and its uncertainty, that can be just as legitimately traded as NASDAQ and the tradtional market. Defining a method of doing that, and setting it up will provide the U.S. with the vehicle to prevent putting excess pressure on accountants and marketers to whittle away expenses and beef up assets to present healthier stocks than they are to take advantage of the speculatators that most young companies draw. In fact, there should be an entrepreneurial wild mustang market similar to the gold rush vitality that Americans come by so naturally, but apart from the traditional markets that require greater control and stability. Organizing such a market would greatly benefit both the industry, the opportunities for investment, and the many personnel who make their living serving the investment industry and its affiliates. Making such an early trader market by taking advantage of the VC interest in early entrance but allow them to cut out early would help to grow the markets exponentially.

Rating:
Summary: Excellent to learn financial analysis
Review: This book is very effective in introducing people to critical financial statement analysis. It helps to have some accounting background though. The material in this book will reinforce a lot of the important financial/accounting concepts that all investors should at least understand before committing to an investment. The author makes the accounting concepts interesting and accessible for most people. In short, the book is a great way to learn/reinforce important financial analysis techniques.