The Financial Storytellers: Decoding Company Culture Through Numbers
Identify potential Markers of Success and Challenge
A warm hello to all new readers! I’m glad you are on board.
New here? I’m Michael and on a mission to make beating the stock market as easy for you as choosing your favorite ice cream. I write an algorithm that does exactly that.
How it all started. The journey so far.
Each number whispers secrets of triumphs and trials and paints a mosaic of corporate strengths and weaknesses.
This article scratches the surface, not the DNA.
It looks for the underlying signals, success marks, and shadows.
Imagine walking through a crowded marketplace full of chatty folks. You may pick up a few sentences here and there, but you cannot follow one entire story while walking by. This overwhelming flood of story particles is a lot like trying to make sense of a company through its earnings reports and income statements. It feels like rowing up a river full of numbers and jargon.
This article isn’t trying to decode the entire mystery of a company’s analysis or predict its future with just two numbers. This article is meant to spark an idea, offering a lens to grasp the analysis process in a new light, not delivering a new solution or conclusion.
Take, for example, the picture below - revenue against net income. At first glance, it seems straightforward—if revenue goes up and net income follows, we’re looking at a success story, right? But, like all good books, it runs deeper.
Let’s split the picture into four chapters. Each one gives you a perspective on the corporate world.
I. The winner?
This chapter is called The Established Athlete and follows companies where revenue and net income move up in lockstep. It’s a straightforward if-then relationship. A stable balance between revenues and costs and shows a very well-oiled machine.
But variations in the angle of their success story—say, less net income growth than expected—might hint at challenges like rising raw material costs or heavy investment in research and development.
And if the angle is steeper, or the line becomes parabolic?
That’s a dream scenario, indicating efficiency and money beyond expectations. Just look at Nvidia right now where we see profit margins of 55% - boom there the rocket takes off and everybody wishes this moment lasts forever.
II. The Hangover?
In this instance, the Hangover is the point of time when the revenues are high or even increasing, but figures of net income are on the declining side. There is grit in the gears of the machine. It is like the morning after the big party where the joy of high sales is spoiled by the headache of cheap wine or one-time effects. The steeper the decline, the more urgent the need for a remedy—be it cost-cutting, finding more affordable suppliers, or other strategic pivots.
III. The Losers?
If there's one thing that's most noticeable here, it's the lack of the Rockey soundtrack: both revenues and net income have continued to edge downward. It’s often a story of processes too inflexible to change, or of a company to set in its ways to evolve with a changing world. While stability can be comforting, too much of it can lead to stagnation and missed opportunities.
IV. The new kid on the block, the hidden gems
The plot twist in this story happens when companies have been facing a drop in revenues (over some time) but, at the same time, have seen their net income going up. A rare and yet exciting moment in time, usually told through transformation; this could be cost-cutting, a new revolutionary technology, or what-have-you, but they’re making it big with less and turning a disadvantage into an advantage.
Many companies travel through these chapters, with the top half being all the stories investors love to hear and the bottom half housing potential treasures for the value hunters among us.
So, what do we call all these quadrants?
It depends on what you are looking for. Like most in life, it’s not good versus bad; you understand the grays of what lies behind those numbers and graphs.
It’s more like a continuum or spectrum of less and more.
Progress
I’ve finished the code for the Deflated Sharpe Ratio—it was quite a puzzle! After a long brain workout, I got it all together. I even ran the code through some older datasets where I knew there was a glitch in my calculations, and guess what? The outcomes made perfect sense. I’d say finishing this was a bullseye. Now, I can’t wait to sift through the final results with it. It feels like unlocking the last level in a long video game!
Plan
Process my final dataset with the Deflated Sharpe Ratio algorithm.
What’s on my head
Cancer is a b*tch.
Nuggets I’ve enjoyed
Have a great day StockStar!
Hit that heart if you like your life!
Michael
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I share my stock investment story without sugarcoating – you get the good, the bad, and those tricky ego trips. I'm developing a service with a mix of smart code and proven investment strategies, making stock analysis a thing of the past if you wish. Why? Because life offers so much more beyond the confines of stock analysis.
Disclaimer:
The information in this article is my personal opinion. I’m not a certified investment professional. It is not consulting, nor does it constitute investment recommendations.
I do my research carefully and follow my personal investment strategy.
The stock market is a complex building with its own rules. There are no rules set in stone, like the rules of physics.
Therefore, use the contents of this newsletter at your own risk and do your own research as well. Investing in the stock market can lead to a total loss of the capital invested.