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Earnings consistency: 10 years without a loss

Why check for positive earnings every year over 10 years, where to find net income in annual reports, what the criterion says and does not say, its traps and the sectors excluded.

Published

Definition

Earnings consistency checks that the company has posted positive net income in each of its last financial years, usually ten. A company that gets through a decade, including at least one recession, without losing money has a resilient business. It is a condition often set before relying on a sustainable dividend.

Formula

Yes if net income attributable to the parent is above zero in each of the last 10 financial years, no otherwise

Where to find it in an annual report

Net income attributable to the parent appears at the bottom of the income statement in each annual report. An annual report usually covers two financial years: you need to look at several, or use a data site such as Macrotrends, which shows ten years of history or more.

Common thresholds

Growing dividend: a yes or no criterion, met if none of the last 10 financial years shows a loss. A more flexible version looks at recurring earnings, excluding one-off items, or allows at most one loss-making year out of ten.

In the preset strategies

Preset strategy Criterion met To monitor Criterion not met
Growing dividend Positive earnings every year for 10 years Yes No

Pitfalls

  • An accounting loss caused by an exceptional impairment, with no cash going out, makes the criterion fail even though the business stayed profitable: read the cause of the loss.
  • Earnings that are positive but falling steadily pass the criterion: read it together with earnings growth.
  • Ten years of economic growth with no crisis make the criterion less demanding than it looks.
  • A company whose scope has changed a lot in ten years is no longer quite the same company.

Where it does not apply

  • Young companies with less than ten years of listing or activity: the history is missing.
  • Highly cyclical companies (commodities, airlines, construction): a loss at the bottom of the cycle is part of their business.

An example

A fictitious company, called Company Z here, was profitable nine years out of ten. In the loss-making year, it wrote down an old acquisition by €200 million, while its recurring operating profit stayed positive. Taken literally, the criterion is not met. The note on the sheet lets you explain this exception, and the strategy can be adapted to look at recurring earnings rather than net income.

Why it is a yes or no

The criterion does not try to measure the level of earnings, which other criteria already cover. It asks a simple question: did the company manage to stay profitable in the bad years? See also the EPS growth entry.

Sources