As we go through earnings season it can be useful to focus on companies that have relatively stronger quarterly financial reports. With about half of the U.S. names in our database reporting, we look for those that have shown strong top line growth, which translates into higher net income if the company is able to keep its costs relatively low. Earnings season is also a time for analysts to change their financial models and adjust their projections for the company’s future profitability.
The decay factor: The initial earnings surprise would have been based on consensus analyst estimates for fiscal year earnings per share. But the surprise becomes less relevant – decays – as time passes, and our figures are adjusted to reflect this. I also used another proprietary variable to determine whether a company is in good financial health. The Morningstar Quantitative Financial Health Score measures the probability a firm will fall into financial distress. It uses a predictive model designed to anticipate when a company may default on its financial obligations.