Don’t Be Fooled By Deceptive Figures: What to Know about Lying Ratios
Investors are divided by how they analyze stocks. On one side, chartists use technical data, like chart patterns, momentum, volume and other data points in order to make predictions about future price movements. On the other side are fundamentalists, who disregard charts and graphs and focus more on financial and economic data along with things like management and growth prospects.
To the fundamentalist, trying to predict price based on past patterns and charts is akin to fortune tellers who base their analysis on the position of the stars. Instead, they look to more solid evidence that can be found in financial statements and economic reports. But trusting the numbers can also be misleading – numbers don’t always the tell the whole story.
Deceptive figures in stock analysis
One would be forgiven if they thought numbers were infallible. After all, no one would argue that one plus one doesn’t equal two. But in financial statement analysis, investors often find that numbers don’t always always reveal the whole story.
Accounting rules make for interesting analytical pieces when items like rent are considered. For some debt obligations, being listed in totality on the balance sheet isn’t required. Instead, only the monthly portion of rent or loan is required. That could tell investors that there’s less debt than really exists for a company.
The interpretation of those numbers brings up another challenge for investors. Globalization means that economies are interconnected in a way that can’t be easily separated. Something that happens in China could impact a major American company, which in turn could affect an entire industry, which causes the U.S. dollar to fall and so on.
Even the experts disagree on what numbers can really mean. One might see a poor earnings report as a sign that the company is mismanaged and doing poorly, while another could argue that the company also missed because it needs to grow bigger and take advantage of economies of scale.
Finally, growth estimates are treated far more like a certainty than they really are by many investors. A company that issues guidance of 10 percent EPS growth affects P/E and stock price, but without context, an EPS growth estimate is only an educated guess. Anything unexpected, like an acquisition, can temporarily decrease earnings with the expectation of boosting them later on.
Fundamental data is often used to determine if a stock should be bought or sold, while technical analysis tells investors when it should be bought or sold. Used together, certain gaps or contradictions can be made clearer. By utilizing all the data available, investors can get a much better estimate of what a stock’s true value really is.