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 All serious investors do their homework before buying a stock. After all, it's your hard earned money and you want to make sure it's working as hard as possible for you. Here we're starting a journey that is going to help you read through online stock reports and snapshots. By the time we're all done, you'll be a more confident investor.
Company Reports / Snapshots
A company report, or what is sometimes referred to as a snapshot, is a good way to become familiar with a company's operation and performance. Throughout this tutorial, we'll be working with an example of a snapshot taken from MSN Money for the Coca-Cola Company. The report is broken down into sections and we'll talk about the important points addressed in each.
Company Operations
The first thing you'll want to understand is what the company actually does to make money. That might sound silly, but you'd be surprised at what you can learn by reading about a stock's operations. In this report, you'll find information such as the primary industry in which the company competes, where they operate geographically, how many employees they have worldwide and the stock exchange where they're traded.
In our Coca-Cola example, we learned:
- Coca Cola has 50,000 employees
- Their products are sold in over 200 countries
- They are traded on the New York Stock Exchange
- They are in the Beverages - Soft Drinks industry
We all know that Coca Cola is a big company, but this operations section gives us a better idea of just how big they really are.
Stock Activity
In the stock activity section of this report we can find information such as the current trading price for a share of Coca Cola, the 52 week high and low, the average daily volume of shares traded, some information on moving averages and the volatility of the stock in terms of a beta.
You'll want to compare the current selling price to the 52 week high, low, and moving averages. Making that comparison will give you a feel for where the stock is trading relative to these boundaries.
The stock trading volume information is good to look at because a jump in volume usually means there is some kind of recent news that has caused investors to increase trading in Coca Cola.
The stock's volatility rating or beta is an indication of how much this stock moves relative to the overall market. If a beta is 1.0, then its volatility is average for the market. Coca Cola's beta was 0.49, so its stock price will move more slowly. That's good if you're looking for a "stable" stock - or one that doesn't swing as far or fast.
Stock Price History
A stock's price history in MSN is stated in terms of relative strength. In this example, they examine the 3, 6 and 12 month change in the price relative to the rest of the market. If the stock's price has exceeded the market's performance, the score approaches 100. But keep in mind that this is looking backwards, which is not always a good indicator of future performance. With scores in the range of 25 - 36, Coca Cola has been underperforming relative to the market.
Financials
Online stock reports and company snapshots often show the researcher high-level information on the financial condition of the company. Here you'll find sales, net income and dividends over the last 12 months and more importantly the expected growth over the next five years. We will be talking more about understanding a company's financial position later in this series.
Fundamental Stock Data
Fundamental stock data is where we think things really start to get interesting. Here you will typically see performance ratios and other information concerning the stock issued by Coca Cola. A couple of observations worth mentioning include:
Debt/Equity Ratio
In general, the lower the Debt / Equity ratio the better off a company is financially because it means they have less debt. If a company has a high Debt / Equity Ratio (>0.5), the stockholders need to worry about their company's ability to make all of their interest expense payments.
Profit Margins
Profit margins are stated in terms of a percentage of sales or revenues. Gross profit margin is calculated as (Revenues - Selling Expense) / Revenues. Gross profit margin tells us how expensive it is to sell a product.
Net profit margin takes all of the company's expenses (except for income taxes) into consideration. Profit margins will vary greatly by industry, so comparisons should only be made for companies in similar industries. As an investor, we want a stock's profit margins to be as high as possible.
Earnings Estimates
If you're going to focus on anything, a company's earnings per share are where you'll want to look. It is a normalized value because you taking earnings and dividing it by the number of shares outstanding. Normalizing data make comparisons more meaningful. Earnings are a direct indicator of the amount of profits a company provides to its shareholders.
Price to Earnings Ratio
A company's price to earnings ratio, or P/E ratio, is a good indicator of how "expensive" a stock is relative to its earnings. When we're evaluating stocks later on, we will be looking for issues that have relatively low Price to Earnings ratio.
A forward P/E ratio takes the current stock price and divides it by the expected earnings over the next twelve months. Google's P/E ratio is a good example to use here:
In early late November 2007, Google's (GOOG) price per share was around $700. Based on the earnings over the prior 12 months, the P/E ratio for GOOG was around 55. This means Google was trading at 55 times its earnings. In our opinion, this would be considered speculative trading.
On the other hand, Google's earnings were expected to rise over the next year. Google's forward P/E was closer to 50 - still much higher than the P/E ratios in the 10 - 20 range that we'd be looking for - but far less speculative than the 95 value observed back in January 2006. This is a good example of why it's important to not just understand where a company has been, but where it is expected to go.
Next up in this series, we'll be discussing Understanding Stock Quotes.
About the Author - Reading Online Stock Reports
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