Yesterday, ResMed Inc. [ASX:RMD] released their third quarter earnings for the fiscal year. ResMed is a cutting-edge, cloud-based medical company. ResMed’s software applications diagnose, treat and manage sleep apnea and other chronic diseases. They treat more than one million patients, who are remotely monitored on a daily basis.
Just yesterday, investors found out how the business was tracking.
Revenue for the quarter came in at $453.9 million. This was a 7% increase when compared to the prior corresponding period. Of this total, $282.2 million came from their US business, which represented a 12% increase over the prior year’s quarter. But, even though revenues were up, net income was down 3%, to $88.5 million, for the quarter.
Research and development (R&D) for the quarter totalled 6.2% of revenues. R&D is important. It’s important for any business, but especially for a medical software business. In an age where technology is rapidly improving, there needs to be a focus on constantly innovating and improving.
On the whole, ResMed didn’t perform exceptionally well. But it wasn’t exceptionally bad either. Nevertheless, ResMed’s shares opened down 6.5%, to $7.37 per share, yesterday.
Shares have traded slightly down again today, sitting around $7.56 per share.
Source: Google Finance
Sometimes there’s no answer
If anyone tells you they know everything about the market, start running. No one can tell what is going to happen tomorrow, or in the next 10 years, when it comes to stocks. There are very educated people out there who have solid predictions of what they think might happen. But a lot of the time they are just that — predictions. They’re using past information, in addition to common knowledge on a subject, to formulate a hypothesis for the future.
But what is more reliable is to understand what has happened after the fact.
I’m referring to ResMed; specifically, why their share price went down. Since revenues were up, shouldn’t have that been a positive for the company? Well, it is positive for ResMed. But we can’t look at fundamentals in isolation. We need to understand how a company’s financial statements interconnect with each other. Understanding this is the basic principle of value investing.
In Phillip A Fisher’s famous stock investor book, Common Stock and Uncommon Profits, he puts it simply: ‘It doesn’t matter how much sales growth a company can have. He believes if a business can’t covert sales into profit then it’s a bad business.’
Therefore, it doesn’t matter if ResMed was able to increase revenues by 7%. Net profits were down, so it negates the revenue gains all together. And this idea might be something to think about as you take on future investments.
Junior Analyst, Money Morning
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