Business Numbers in the News
Your quest for accurate numbers will be more successful if you are aware of a few key number-related business concepts.
How Has The Business Performed?
A business exists to provide a product or service in return for payment. When the product or service is sold, the dollars generated are termed revenues. The business firm must spend money to exist and to provide the product or service,and the money thus spent is termed expenses. When revenues are greater than expenses, the difference in the two numbers is profit or earnings.When expenses are greater than revenues, the difference is loss.
Thus, if you are editing a business story that says a company's earnings last year were $19.4 million based on revenues of $189.6 million and expenses of $160.2 million, you would do the arithmetic and learn that there is a $10 million error. This would prompt you to consult the reporter or the source to learn which of the three numbers is incorrect.
Publicly owned companies are obligated by law to make public their profit performance every three months. The accounting document they use to calculate that performance is called an income statement or a profit and loss statement. The release of quarterly earnings information almost always is accompanied by a brief written statement commenting on notable aspects of the business's recent performance. This written statement is termed the earnings report.
Be sure you are clear on these differences. The newspaper's credibility suffers with business people when a story says: "The company's second-quarter income statement said bad weather in Ohio caused sales to drop in March." Indeed, the company's earnings report may have included such information, but its income statement is simply several columns of labeled numbers. So it is appropriate to say: "The company's second-quarter earnings report said bad weather...."
How Healthy Is The Business?
Often the health or well being of a business is news because such information can indicate the likelihood of a firm to expand and create new jobs or the likelihood that it will retrench or even go out of business. One indicator of a firm's health is its recent earnings performance as indicated by income statements and earnings reports. Other useful information about a company's financial health is available from analyzing its balance sheet.
You need not become an expert at analyzing a balance sheet, but if you understand what it is and what type of information it contains, you will be better equipped to help eliminate errors from stories about business firms.
A balance sheet is different from an income statement in several important ways. While an income statement reflects a company's business activity over a period of time (i.e., three months or a year), a balance sheet is a snapshot of a firm's circumstances on one given day (usually the last day of a month, a quarter or a year). The income statement reflects information about revenues, expenses and profits, but the balance sheet reflects the value of things owned by the company (i.e., money, equipment, property, inventory, accounts receivable) and ways in which the company owes others (debts, accounts payable, tax liabilities). The things owned by the company are termed assets, and the company's various debts are termed liabilities. When a company's assets are greater than its liabilities, the difference is called retained earnings or owners equity or shareholder equity. When a company's liabilities are greater than its assets, the difference is termed retained losses.
Usually a balance sheet is presented with comparable data from a prior period (i.e., the previous month, quarter or year). When retained earnings are increasing notably, that's an indication of good financial health. When debts or accounts receivable or inventories go up noticeably, that raises questions that could indicate problems with the company's financial well-being. A good reporter should raise questions about such balance sheet gyrations, and a good copy editor should be sure those questions are answered clearly in the story.
Who Owns The Business?
Sometimes it is important to understand the rudiments of ownership when editing a story.
When one person owns all of a business, it is a proprietorship. When a small group of people own a firm, it is a partnership.When a company is owned by many people, it is said to be a stock-owned company. Some stock-owned companies are privately owned. That means that a moderate number of people (usually fewer than 100) own all the stock in the company, and the company does not sell stock except in infrequent, private transactions. Many stock-owned companies are publicly owned. That means their stocks are sold publicly on a stock exchange through retail stock brokers.
Almost all of the giant corporations in this country are publicly owned, and the performance of publicly owned companies often is in the news. Sometimes they make news with their quarterly earnings reports and income statements. Sometimes they make news because the price of their stock moves up or down dramatically. There are a few concepts you should understand when editing a story about a company's stock performance, including:
Stock Price: Each business day millions of shares of stock are bought and sold on this country's stock exchanges (the most notable of which are the New York Stock Exchange, the American Stock Exchange and NASDAQ or the National Association of Security Dealers Automated Quotations). These transactions are the result of an on-going auction in which buyers and sellers must agree on a price.
Many newspaper stock tables report the day-end prices for thousands of company stocks. Generally when demand for a stock increases,the price goes up. When demand drops, so does the price. Often there is an identifiable reason for dramatic stock movement (i.e., unexpectedly high or low announced or anticipated profits, a new discovery, or an economic, political or social development that is expected to influence the company's future profits). News stories about major changes in stock values should address the apparent causes.
Earnings Per Share: The profits of a public company often are noted as a raw number (i.e., General Motors reported earnings of $372 million for the first quarter) and from a calculation called earnings per share. The latter is the total profit amount divided by the number of shares of company stock currently owned. So if there were 130 million shares of General Motors stock outstanding and the quarterly earnings were $372 million, the earnings per share would be $2.86 ($372 million divided by 130 million shares equals $2.86).
Price/Earnings Ratio: Another newsworthy business number can be the price/earnings ratio (sometimes called the P/E ratio). This is the price of a share of stock divided by the company's earnings per share for the most recent 12 months.
So if a company's stock is selling for $36.50 per share and its profits for the most recent 12 months totaled $8.11, the price/earnings ratio would be 4.5 to 1 (computed by dividing $36.50 by $8.11, which yields 4.5).
If a company is financially healthy and its performance outlook is good, its P/E ratio tends to be higher, because investors are willing to pay more for the stock, anticipating higher future earnings. Under certain circumstances, some investors consider a low P/E ratio as an indication of a stock with a bargain price.
Stocks in a given industry tend to have similar P/E ratios. Companies in growth industries tend to have higher P/E ratios than do companies in long-established industries.
If you are editing a story that identifies a P/E ratio that is greater than 20 or less than 5, it is reasonable to raise a question about it (especially if the context of the story does not make clear that the price of the stock is unusually high or low).
Dividends: Many companies regularly pay money to their stockholders. These payments are called dividends, and they usually are made in quarterly installments. Usually the dividend is a portion of the earnings per share, but if a company has no profit during a given period, it might be able to use earnings retained from prior profitable periods to pay its current dividend. For a variety of reasons, some companies do not pay dividends or do not pay them during certain periods of the company's development.
Dividends typically are a few dollars per share per quarter. If you edit a story that refers to dividends of several hundred dollars per share, that should prompt you to raise questions with the reporter.
A final note: Don’t assume the reader knows all this jargon. Whenever possible, slip in — casually, without fanfare — what all this really means.
Updated Aug. 12, 2009