We recently spoke with the logistics manager for a public company in the retail industry. During the conversation the topic of quarterly earnings results came up. The manager described how he was able to beat his expense reduction goal during a recent quarter, which one might expect was a good thing. Instead, his boss said “we can’t cut that much this quarter – it’ll impact our earnings per share too much, and we’ll have nothing left for next quarter.”

Incentives are what they are and we’re not trying to beat anybody up for doing what their boss wants them to do. Critics of public company behavior will point to instances like this as manifestations of “corporate short-termism,” which they regard as self-serving on the part of “C Level” managers (CEOs, COOs, etc.). Having a short-term focus isn’t bad in itself, but it can be if managers become myopic, losing the ability to execute longer term strategies, as they become wrapped up in the urgent task of meeting earnings expectations. To the extent that short-term thinking is bad for shareholders, we agree with the critics.

A similar dynamic among professional investors is evident when we update our financial models with quarterly earnings releases. After the company managers have delivered their summary of the quarter on the conference call, they generally open up the phone lines for questions from investors. Overwhelmingly, the respondents are “sell-side” analysts updating their own models for dissemination to their clients, and often times those analysts’ questions will circle around details that many of us would regard as minutiae: can you tell us whether the increased capital expenditures next quarter will be accounted for as maintenance; what is your expectation for share repurchases before the end of the year; do you expect your tax rate to change with your new international venture; – questions that seem to scream: “Look, I’m not really as interested in how you’re executing your strategy as I am in tightening up my quarterly EPS estimate.”

At Peloton, we want to track a few quantitative aspects closely, while not getting lost in the weeds. What’s the right level of detail? We track sales by product, business line, or geography as well as pricing data, because those details have the most direct impact on revenues. We also track input costs (Costs of Goods Sold) to measure pricing power. Operating costs are important as well: what companies spend on overhead or marketing, and whether they are investing adequately in research and development. Changes to operating cash flow and capital expenditures are important details, particularly for companies with high dividend payouts. And, we measure how changes in the income statement and cash flow statement impact specific debt and equity accounts on the balance sheet.

As important as the quantitative data is our understanding of how the company’s financial results impact their strategic initiatives. We try to identify 3 or more operating catalysts for every company we invest in on behalf of our clients, work to understand what could go wrong with our thesis, and measure progress toward these ends. In our investment process, this level of detail keeps us anchored where we think we should be – valuing companies accurately – but avoids spending undue time on specific point estimates.