This post is based on a question from one of the readers, “I sometimes see research reports of various broker-houses. They show future EPS. They say company has orders lined-up in order book. I am not sure how to get order book details and Future EPS of a company”. I thought this was an interesting question in a sense that how it is interpreted by us as individual investors. Like everything, this also can be interpreted in multiple different ways.
In my view, there is no effective way to measure the impact of future order book on future EPS. Theoretically, it is possible to translate this into future EPS. But I believe it can only be done by company executives. It is company insiders who know the operating cost, raw material cost, possibility of order completion, taxation, and when the revenue is likely to be realized (i.e. received by the company). I cannot understand how brokerage houses or independent analyst can make that estimate. I would like to know if anybody can share the methodology? To me, it only has a marketing value, nothing beyond that. Let me use an example.
Recently, I discussed return of investment from TIPBlog where I showed intangible (difficult to quantify) and tangible (direct revenue) benefits. I showed that the revenue is $1047 for last 10 months. Considering that it is a company and it had publicly traded shares to stock exchanges. There are two perspectives.
- One perspective is from company insider. Only I know that direct ads are fixed time based revenues. They will get over in say somewhere between 12 months to 24 months. Now, for company (i.e. TIPBlog) to really grow, the company needs future orders of $550 plus more. At a minimum the company atleast needs $550 to just replace the existing revenue. And to grow company needs more. Company executives can make some estimates based on its operational variables. In my blog case, I can make estimate of my future earnings, depending upon my interaction with marketers and advertisers. Again note that they are my best estimates only. I may or may not be able to complete them, or may get canceled half way through, or may get canceled altogether. As an outsider, you will never know what levels of orders are getting completed, or what level of orders are just to replace the existing orders, or what levels of orders are actually for growth?
- Second perspective is from brokerage houses. I really do now know how one can incorporate impact of order line-up to EPS estimate. I am running my company TIPBlog. How does a brokerage house know what are my costs and what is my future expected contract situation. Right? Either they have insider information or they will again use estimates from company executives (i.e me in case of TIPBlog). The business model at brokerage houses depends upon buying and selling the stock. They have to either recommend buying the shares or selling the shares. Otherwise how will they earn brokerage commissions? There is a general perception that lined-up order books is good, therefore, it is used as marketing tool to drum up the case for buy recommendations.
Brokerage houses do not have their hard earned money on line. It is our hard earned money that is on line here. As individual sane investors, the only parameters that we can have access to are its financial statement of past and its annual report. What is important to understand is how the management is running the company? Are they making effective use of capital to make increased profits?
Do not get me wrong. I am not saying future order line up is not good or it has no meaning. It does matter. However, I am not aware of any effective method to translate to future EPS. Therefore, we should look at other parameters and not focus too much on order books.
calculating future EPS, future EPS, future order book, return on investment