Serious investors do their research before buying a stock. After all, it's their hard earned money, and they want to make sure they maximize their return on investment. In this article, we're going to provide insights into an approach that should help individuals to read through online stock reports and snapshots more effectively and efficiently.
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 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.
The first factor the analyst needs to understand is what the company actually does to make money. That might sound silly, but it's surprising what can be learned by reading about a stock's operations. This report contains 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 their common shares are traded.
For Coca-Cola, the analyst would have learned:
Everyone knows that Coca Cola is a big company, but this operations section gives the analyst a better idea of their size along several dimensions.
In the stock activity section of this report, it's possible to 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 beta.
Investors will often compare the current selling price to the 52 week high, low, and moving averages. Making that comparison provides insights into the current price per share relative to these boundaries.
The stock trading volume should also be reviewed, since 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 the 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 for investors looking for a "stable" stock, or one that doesn't swing as far or fast.
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. Keep in mind this is looking backwards, which is not always a good indicator of future performance. With scores in the range of 25 to 36, Coca Cola has been underperforming relative to the market.
Online stock reports and company snapshots often show the researcher high-level information on the financial condition of the company. In this section will be sales, net income and dividends over the last 12 months, and more importantly, the expected growth over the next five years. This is discussed at length in an article that talks about understanding a company's financial position later in this series.
This is where research really starts to get interesting. This data includes key performance ratios, balance sheet, and income statement information that impacts the stock issued by Coca Cola. Several observations worth mentioning include:
In general, the lower the debt / equity ratio, the more financially sound a company. A low ratio indicates the company has less debt relative to shareholder equity. If a company has a high debt / equity ratio (> 0.5), the shareholders need to worry about their company's ability to make interest payments as they come due.
Profit margins are stated in terms of a percentage of sales or revenues. Gross profit margin is calculated as (Revenues - Selling Expense) / Revenues. This measure tells the analyst how expensive it is to sell a product.
Net profit margin takes all of the company's expenses (except for income taxes) into consideration. Margins will vary greatly, so comparisons should only be made for companies in similar industries. Investors like to see a stock's profit margins as high as possible.
If there is one single factor to focus on, it's a company's earnings per share. This is considered a normalized value, since earnings are divided by the number of shares outstanding. Normalizing data makes comparisons more meaningful. Earnings are a direct indicator of the amount of profits a company provides to its shareholders.
A company's price to earnings ratio, or P/E, is a good indicator of how "expensive" a stock is relative to its earnings. When evaluating stocks later in this series, we will be looking for issues that have relatively low price to earnings ratios.
A forward P/E takes the current stock price and divides it by the expected earnings over the next twelve months. Google's P/E is a good example to use here:
In 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 most cases, 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. This is still much higher than ratios in the 10 to 20 range, but far less speculative than the 95 value observed back in January 2006. This is a good example of why it's important to understand both where a company has been, as well as where it is expected to go.
Next up in this series: Understanding Stock Quotes.
About the Author - Reading Online Stock Reports - Copyright © 2006 - 2015 Money-Zine.com (Last Reviewed on December 23, 2015)