Big revenue doesn't always mean profits

Posted: February 28, 2013

Q: Might a company that rakes in a lot of money still be a bad investment?

- L.D., Worcester, Mass.

A: It's possible. Remember that the money a company takes in (its revenue, or sales) is its top line. Before you get to its bottom line of profits, you have to take out expenses, such as salaries, supplies and taxes. It's critical to know how much (if anything) the company keeps as profit, and whether important numbers, such as sales and profits, are increasing.

Arch Coal, for example, has had average annual revenue growth of more than 12 percent over the last five years, and growth has accelerated. But its earnings have been uneven and recently entered negative territory.

That's worrisome, but ailing companies can be good investments sometimes - if they turn themselves around. Study their financial reports, see if they're gaining or losing market share, how strong their competitive advantages are, how much faith you have in their management and whether their futures seem promising.

Look for red flags such as major legal problems or investigations into accounting. Or just skip them and focus instead on profitable firms. Coal companies have struggled lately, in part due to low natural-gas prices.

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