man jumping on coins

The Past Does Not Represent the Future!?

“The previous performance of a company’s stock price is not a guarantee of its future performance.”  We all heard this before.  Now, can a company’s previous performance be a strong indicator of its future performance? At the end of the day, isn’t the stock price performance of a company serving as an indicator of the company’s future performance? Regardless, it all comes down to the company’s performance and its stock price is just a reflection.  Isn’t it?

past present future

We do believe that the historic performance of a company's stock will not guarantee the company's future stock performance because there are just so many variables involved that could influence the stock price. However, we do believe that the company's historical performance is a strong indicator of how the company will be operated and managed in the future. In the other words, it would be hard to find a badly operated company with a consistent rise in its stock price.

If the stock price is the result of a company’s performance, then, how to measure the performance of a company?

Performing financial projection analysis is an important aspect of evaluating the performance of a company by taking historical performance into account. For example, a company has been generating declining revenue in a favorable macro environment, will it just reverse the trend out of blue? No.  And, yes, I am talking about IBM and the CEO is got to go.

Let’s use IBM as an example analyze the company with PRJ Analytics.  We will not make any projection by keeping all projection assumptions constant, we are just focusing on the historical performance for the demonstration purpose.

The company had declined revenues year-over-year from 2018 till 2021 in an environment where cloud computing and artificial intelligence had taken off. The net profit remained flat in 2020 and 2021. Not too bad given a declined revenue. Let’s dig a little deeper.

income statement bar chart

Let’s compare the expenses against its revenue.  From2020 to 2021, the revenue and the cost of goods sold declined by 22% and 32%,respectively. It’s apparent that the company maintained its somehow flat 2021net income profit by cost-cutting. Simply put, the expense declined more than the revenue did.

Income statement growth

Now, without any dramatic change both internally or externally, will the company’s revenue change its downward trajectory? How much more cost-cutting can the company achieve? Layoffs?

Unarguably, that past performance does not predict future performance. But having a competent and knowledgeable management team with a tested track record is an excellent way to gauge how a company's future performance will be. If a company has consistently achieved its milestones and goals,  presumably the trend will continue for years to come.