Price/earnings ratio (P/E) is the share price divided by the last 4 quarters earnings per share. (P/E) is the primary means of valuing a stock. It tells you how much investors are willing to pay for each $1 of earnings. Stocks with faster earnings growth rates generally get higher P/Es.
Price-to-book-value ratio (P/B) is the share price divided by book value (a firm's assets minus its liabilities) per share. This ratio helps when comparing asset-rich companies such as banks, brokers, and insurers. A low P/B is one sign that a stock may be a good value play.
Price-to-cash-flow ratio (P/CF) is the share price divided by annual cash flow (earnings plus depreciation and amortization) per share. It is useful for comparing media, oil exploration, and other companies with large non cash charges that are deducted from earnings. This ratio, which is the share price divided by non-cash charges per share, shows how much cash is actually available to the company. This ratio is often used to gauge the value of businesses that make large capital outlays that can result in non-cash charges that, in turn, can depress reported earnings per share.
Price-to-sales ratio (P/S) is the share price divided by annual sales per share. A low (P/S) can help identify companies that have strong businesses but depressed earnings. It is also used to measure companies in rapidly growing industries with little or no profits, such as internet firms.
Price-to-growth-flow ratio is the share price divided by growth flow (annual earnings plus research-and-development costs) per share. This technique was developed by technology tracker Michael Murphy. It is useful for assessing emerging tech firms that plow profits into product development.
Payout ratio is dividends per share divided by earnings per share. With utilities and other yields stocks, it helps you judge the reliability of a dividend by telling you what percentage of profits a company is paying out to shareholders.
PEG ratio = P/E divided by expected earnings growth rate. In today's bull market, a PEG ratio below 1.5 suggests a good value; a ratio above 2 can be a sign of an overheated stock.
Listed below is some information that will help you read a financial statement.
Can the company pay its bills?
Is it carrying to much debt?
Is it making enough profit in relation to how much capital it is using?
The Income Statement records activity over a quarter or a year. It is also know as a statement of earnings of profit and loss (P&L) statement. It summarizes the companies revenue and cost of doing business for a given accounting period, usually the fiscal year. Cost of goods sold, selling and administrative expenses, and depreciation are subtracted from total sales to arrive at operating earnings. Then interest expenses are subtracted to determine pretax income. Net income is what remains after income taxes have been paid. (Key numbers include, net sales, cost of goods, gross profit, and net income).
The Balance Sheet or Statement of Condition is the statement of financial position. This details the companies assets, liabilities and equity. It is a picture of a company at a moment in time.
Current Assets can be converted into cash within a year or less (cash, accounts rec., marketable securities, inventory).
Fixed Assets are Illiquid investments, long term company use, physical plant or building, equipment, and land.
Other Assets is intellectual property, patents and copyrights, goodwill, royalty payment, and exclusive use contracts.
Liabilities is what the company owes (current and long term).
Long Term Liabilities is loans and other obligations that are payable in a year or more (Bonds, pension, deferred income).
Equity is capital or net worth. It is the valve of the business after all obligations have been satisfied (sum of the companies stock and it's retained earnings).
��
Debt-to-Equity-ratio is calculated by dividing long term debt by total prudent debt load.
Market Capitalization is the current price of the stock multiplied by the number of shares outstanding.
(ROI) Earnings is the (before interest, taxes, and dividends) divided by total capital (all equity and long term debt). It tells how well the company is converting capital into profit.
Asset turnover is the net sales divided by total assets. It tells how well a company is using its resources to generate income.
Financing activity is the result of transactions with lenders and investors. It combines both operating and non-operating income and diagrams the companies financial game plan. It tells how much cash flow comes from profits. The cash that comes from operations is usually what receives the closest scrutiny from investors.
Investing activity is the impact of all trading in long-term assets.
Statement of Cash Flows tells how the company derives its income and how it spends it.
Operating activity is all profit making activities.
�
Company Earnings
Corporate profits are the single most important engine driving share prices. We buy stocks for their earning power. Essentially, we are buying shares of a company's future profit stream. If a company does not have good earnings why invest you hard earned money in their stock?
Companies report earnings in different ways.
EBITDA - earnings before interest, taxes, depreciation and amortization
diluted earnings/shares - adds a firms preferred stock, unexercised stock options and convertible debt to the number of common shares in order to figure the divisor
pro forma earnings - these figures exclude so called one-time items, typically things like merger and restructuring costs and non-cash items
EPS - calculated by dividing a companies total after-tax profit by the number of its common shares outstanding�
SEC reports (10-K,10-Q) - these have to adhere to generally accepted accounting principles (GAAP)
Mutual Funds
Don't pay extra tax by making the mistake of not adding reinvested dividends to your cost basis. If you reinvest capital gains and dividends income into more shares, it increases your cost basis. If you later sell those shares, your profit or capital gain on the sale is reduced.
How to measure investment risk
These risk techniques take into consideration past performance. Can these techniques tell us anything about future performance? We're talking about probabilities here, not certainties.
�
Beta
Beta tells you how much an investment's returns go up and down in relation to a specific benchmark. The benchmark you use is assigned a beta of 1. Investments with betas higher than 1 fluctuate more than the benchmark, while those with lower betas fluctuate less.
Standard Deviation
Standard Deviation tells you how much the short-term returns of a security or portfolio of investments have jumped up and down around its long-term average - and are therefore likely to do so in the future.
Dollar-Cost-Averaging
The key investment concept behind dollar-cost-averaging is that when prices are up you purchase fewer shares and when prices are down you purchase more. Dollar-cost-averaging tends to reduce the highs and the lows of the market.
FYI
Six factors that should affect your investment decisions, portfolio construction and management process for the individual investor: time horizon, liquidity, marketability, tax consequences, risk tolerance level, and diversification.
Limit Sell - will trade if stock is trading at set price or higher
Limit Buy - will trade if stock is trading at set price or lower
Stop Sell - will trade if stock is trading at set price or lower
Stop Buy - will trade if stock is trading at set price or higher
Calculating Capital Gains
To calculate the cost basis of a $200 stock you bought for $100 that has split 3 times, divide $100 by (2x2x2) to arrive at a cost basis of $12.50.
Return to Investment Planning
Home