Use
this stock research information to start your stock research.
Earnings
and Profitability
Check to see if your company has earnings. Then check to
see if there has been a yearly increase in earnings for the
past five years. After earnings verify the company has a
profit. To the novice investor, it seems that a company cannot
exist without profits. But, companies can and they do. Some
companies get their start with venture capital funding, this
funding is paid to companies as high as 5, 10, 50 million
dollars and up.
Some companies make good on their
venture capital funding, pay the investors, and make a
profit, and some don’t.
This is what happened with the dot-com bombs of recent years,
many of those companies had venture capital funding. Some
of them were given millions of dollars without having a company,
earnings, or lest I say, profitability. Only a few of those
companies persisted, developed products, and turned a profit.
Since this is the highest risk level of a new venture company,
it is best to invest in these companies after they have proven
products and have turned a profit.
P/E or Price to Earnings Ratio
First look at the company’s earnings as they stand-alone.
Does the company even have earnings? How can a company even
exist without earnings? During the recent dot-com craze of
the late 90’s , many of the companies’ stock
prices increased dramatically in just a few hours to a few
days, after going public, but yet the companies had no earnings.
The reason they were able to debut on the stock market, was
in part, as I mentioned above, because of funding from private
sources or venture capital companies. After going public,
their stock prices dramatically increased because of speculation
that they would have future earnings.
The Internet was and still is relatively new. Some companies
have made a lot of money and real earnings on the Internet
in a relatively short time, or it seemed relatively short
compared to the standard brick-and-mortar companies, as they
are called. Actually, many of the Internet companies that
are making a lot of money with real earnings had been in
existence for a few years, some developing for quite a few
years behind the scenes, before they went public.
What was the clue that investors had that the dot-bombs (as
I call them) had no earnings. Inexperienced investors could
have looked at their P/E or price to earnings ratios. It
was not uncommon to see a price to earnings ratio of 300
or 350 for some of these companies! Now that is high! In
contrast many value companies have price to earnings ratios
of 15, 20, or 30.
P/E or price to earnings ratio: Calculations
To calculate the price to earnings ratio, divide the stocks
latest price by the earnings for the past four quarters.
Example:
$20 current stock price = $10
$2 past earnings per share
This is called the trailing PE because it is based on the
companies past earnings. You can also figure out the companies
projected earnings with the same formula, just substitute
the projected earnings figure with the past earnings figure.
Price to Book Ratio
The price to book ratio compares the companies price to
its assets.
Example:
$20 current stock price = 100% price-book ratio
$2 book value per share
If the company sells for more than its book value, investors
think highly of the company. If it sells for less, investors
don’t think much of the assets. Some people buy undervalued
stocks, that is, stocks selling below book value because
they feel they are getting a bargain. Sometimes when you
hear media reports about a stock you will hear them mention
that the current stock is “selling below book value.” Some
people use that as a clue to start research on that stock.
Debt Ratio
Since the Enron stock scandal, other
companies have been audited by the Securities and Exchange
Commission, and had
to restate their earnings or have voluntarily restated their
earnings. Another fundamental they have had to restate is
debt. Low debt is a fundamental that many investors use to
purchase a stock. In light of the Enron scandal, some companies
have admitted to hiding debt in various ways. In order to
understand most of the fundamentals of a company, you will
need to read the annual report, and the quarterly reports.
Look for things that don’t add up, that don’t
make sense or just seem “padded.”
The debt ratio; is the liabilities of the company minus
the total shareholders equity. 30% debt-equity ratio is considered
low debt.
Example:
10 million total liabilities = 20% debt-equity ratio
50 million?????????
Compare debt to your house mortgage, if you have no mortgage,
and therefore no debt on your home, the less you depend
on your income to sustain it. You primarily have maintenance
cost and taxes. Debt is a good measure of a company’s
stability because the less debt a company has the less
it has to depend on financing to sustain itself. If debt
is used wisely and the company can handle the payments
easily, debt is not a problem. There is always the potential
for problems if the company has high debt and their core
products stop selling or have to be recalled for some reason,
and they can’t make their debt payments. Conservative
investors usually opt for low-debt companies.
Dividend Payout Ratios
Tells how much of a companies profits are paid out in dividends.
Older more established companies pay high dividends, where
newer growth companies invest back into the company for growth
and development of new products.
Example:
$2 dividends per share = 50% dividend payout
$3 earnings per share
Dividend payouts more than 50% means the company is not reinvesting
much back into the company.
Industry Leader/Company Leader
Check to see if the company is in
a leading industry, and that the company is a leading company
in its industry. You
wouldn’t want to invest in an industry that is going
out of business, or a company that is doing the least business
out of all companies in its industry. You can find leading
industries and leading companies categorized in major financial
newspapers. Leading companies are also mentioned on televised
financial news reports.
Management
Analyzing the company management is not a quantitative measure,
but it is an indicator. Research the company management to
see if they have been successful developing products for
their company in the past, or if they have successfully developed
other companies or products. Read about them in online proprietary
stock reports, read their history in sec (securities and
exchange commission) reports, read about them in your brokers
online reports. Some financial newspapers and magazines will
also feature reports on company management. Jack Walsh, the
former CEO of General Electric is an example of great company
management, as touted by the press.
Read Annual Reports
There are several places to study
the companies you are interested in researching. First,
start with the company
annual report. You can call the investor relations of the
company and order a report. Also, some financial newspapers
provide a place where you can order annual reports. Just
check the stock section of major financial newspapers. Some
annual reports are available online. Check with your online
service or your online broker service to see if you can get
annual reports online. You can also use “Edgar” online.
Use “Edgar” at:
www.sec.gov/edgar/quickedgar.htm
The Securities and Exchange Commission
provides Edgar. Using “Edgar,” you
can do company research. You can read annual reports, quarterly
reports, mutual fund annual reports and mutual fund prospectuses.
There is even a tutorial to teach you to use Edgar, at the
Edgar website.
Long-Term Hold
Why do stocks work best when held long term? It takes time
for a company to develop a product, it takes time for a company
to market and sell a product, and so it takes time for a
stock to move up in price. With that said, even though you
research investments before buying them, buy and hold does
not mean, buy and ignore.
You should periodically evaluate the companies you hold to
verify that it has not taken a bad turn, and stands to
go bankrupt. You can also monitor your investments with
company news using financial newspapers, financial news
on television, and online financial news. There are companies
that go bankrupt periodically.
If you research your company well and make an informed decision
to purchase your company stock, invest in companies with
high value, and monitor your company periodically, your chances
of losing money with a bankrupt company should be slim.
Summary: What factors should you consider in your investment
research?
Long term investing
Low taxes on investments
Strong quality companies
Great company management
Excerpt from the book, "Let's Get Financial Savvy!
From Debt-Free to Investing With Ease" by Dr. L. Center-Shabazz,
order your copy now in pre-release.
Exercises: Use our stocks to look at list, choose 10 companies,
go to the stock/quote chart at MsFy.com, plug in the symbols
and look at the 1 year, 5 year, and 10year history of your
companies, earnings per share, dividend payout, and stock
split history(use the drop-down menus). Based on your findings,
which companies would you buy?
Lois Center-Shabazz is the founder
of MsFinancialSavvy.com and author of the 3-time award-winning
personal finance book, Let's Get Financial Savvy! ISBN #0971979502.
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