Average Income Not Always Relevant to a Company's Earning Power
Saj Karsan submits:When estimating a company's earning power, it's important to look at its annual earnings over the past business cycle, rather than assume that its current earnings are representative of future earnings. In Security Analysis, Ben Graham and David Dodd discussed the need to smooth out fluctuations in annual earnings, and we have looked at some reasons for why that is the case. Sometimes, however, properties of a company have changed, and current earnings may actually be a better gauge of a company's earnings prospects going forward. Consider Dover Downs Gaming (DDE), a hotel/casino/track operator in Delaware. In addition to corporate tax rates that are already quite high, the state government has been increasing the company's gaming fees and taxes. The fee changes are not minimal, and are not recorded as taxes, and therefore show up as increased operating expenses. Consider the following statement from the recent 10-Q: Gaming expenses increased by $8,066,000, or 6.1%, primarily as a result of the opening of our table game operations and significantly higher gaming taxes and slot machine fees that resulted from legislation passed in May of 2009. The impact of this legislative initiative resulted in an increase in our gaming taxes and slot machine fees of approximately $5,600,000 in the first nine months of 2010."Complete Story »
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