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their goods, and yet be teetering on the brink of insolvency. In other words, learning a
company's current and debt ratios isn't enough: You have to learn what they mean.
Book Value
Having learned how to determine the odds of a company going bankrupt, and the odds of its
investors being able to get some or all of their investment back, the next logical question is,
"How much will I get back?" Fortunately, the book value will tell you just that, or at least give
a reasonable estimate. Similar to the way book values are used in the world of buying and
selling secondhand cars, a stock's book value attempts to determine the worth of a company.
Once the book value is known, analysts can subtract the company's liabilities and divide the
remainder by the total number of shareholders to determine how much each investor would
receive in the case of the company going out of business.
Plain English
Book value is a simplistic measurement of the total value of a company. It is
determined by adding up the values of all tangible assets.
I am not going to give you the formula for determining the book value, because it is one of
those statistics that requires spreadsheets, algebraic calculations, and a Ph.D. in
mathematics. Suffice it to say that, like any of the preceding measurements, the book value
should be used in context with book values of other stocks within the same industry, as well
as the same stock's own previous performance.
In addition, the book value has another use. Investors routinely compare the book value with
the current market price of the stock to determine how far away from its actual value the
stock is trading. As a very general guideline, stocks typically trade at one to two times their
book value. Higher book values are certainly more desirable. However, I can't stress enough
that, by themselves, these measurements may not necessarily accurately depict the
company. You're going to have to do your homework. The more you learn, the better your
investment decisions will be.
Credit Ratings
In the current and debt ratio example, we discussed how much debt you and your brother
were carrying and how effectively you were each handling it. As individuals, much of this
information about you would be available by means of a credit report to anyone who was
entitled to see it. With the information on a credit report, entities like mortgage banks and car
lease companies can determine whether or not you or your brother would meet their specific
minimal criteria.
Wouldn't it be a great world if someone would step in and figure out that kind of stuff for you
in the stock market? Luckily for you, a number of companies do exactly that. Stocks, like
people, get assigned a credit rating, and that credit rating can be used to determine any
number of things, including whether or not you choose to purchase that stock as an
investment. Such companies as Moody's and Standard and Poor assign these credit ratings,
which are available in most newspapers and on the Internet. The credit ratings for stock are a
little more detailed since they measure substantially more, but most break down into nine
categories using combinations of As, Bs, and Cs as demonstrated in the following table.
Plain English
Credit ratings are evaluations by disinterested parties and services regarding the
financial health of a company.
Standard & Poor Moody's Fitch Rating
AAA Aaa AAA The Best
AA Aa AA Very Good
A A A Pretty Good
BBB Baa BBB Good
BB Ba BB So-So
B B B Bad
CCC Caa CCC Pretty Bad
CC C CC Very Bad
C C Are You Nuts?
There's no D, DD, or DDD since you can't more its bankrupt. Once a company reaches the
"D" stage by going bankrupt, its rating gets dropped as you can't give a rating to a company
that's out of business.
Frankly, few of us enjoy math, but as you can see, through its use you can uncover a
substantial amount of incredibly valuable information. As finance, investment, and money are
all measured numerically, numbers will provide the best overall picture of a stock's
performance. In addition, the number of formulas you need to extract the most representative
view are neither complicated nor many in number. For these reasons, the math part of your
stock research should never be minimized or avoided. The time and effort you invest in your
research will directly pay off in the potential for your cash investment to flourish.
The 30-Second Recap
Researching stock through the use of math will enable you to project its future
performance by viewing its past performance. The amount of math necessary to do this
is minimal and the formulas required are not complicated.
Price-to-earnings ratios are one of three percentages determined by comparing the
current market of the stock to its dividends over the last four calendar quarters (trailing),
the preceding four actual quarters (standard), or the last two actual quarters and two
future projected quarters.
The earnings per share formula enables you to determine the amount of the stock's
dividend by dividing the total amount of the issuing company's net earnings by the total
number of outstanding common shares.
Current/dividend yields measure the percentage of the stock's annual divided payments
as compared to its market value. This information will enable you to determine how
much profit the stock has made as a percentage of its initial purchase cost.
Current ratio is a measurement of how likely and how much an investor would be able to
recoup in the case of a company's insolvency (bankruptcy). It is determined by dividing a
company's assets by it's liabilities.
Debt ratios are a measurement of how near or far a company's relative worth places it
toward bankruptcy. It is computed by dividing the company's debt by its assets.
Book values are a measurement of the total value of a company. It is computed by a
highly complicated formula which adds up everything including intangible items such
as name recognition a company owns.
Credit ratings are evaluations of the value and ability of companies to repay their debts
and produce future earnings. They are performed by professional disinterested parties
such as Moody's and Standard and Poor.
I l@ve RuBoard
I l@ve RuBoard
Lesson 13. Choosing a Strategy
In this lesson you will learn about methods used to determine how to put together your own
customized investment portfolio.
I l@ve RuBoard
I l@ve RuBoard
Investment Strategies
Still with me? Okay, you've decided what you want to accomplish by investing, and you know
what kind of stocks you are looking for. You have a handle on the potholes that can hold you
back, and you've learned how to number-crunch to analyze a stock's performance. You have
one step left: deciding how you will apply all this knowledge to your investments. This is both
the easiest and the most difficult step of all.
Think of it as buying a car. You've done your research: You've compared the prices at other
dealers, you've checked the prices of comparable cars. You've checked the car sales market
to find out how this brand is selling and when the best time to buy one is. You've even
spoken to prior customers to learn just how the salesmen here haggle. What's your initial
offer for the car going to be? How much will you accept for payments? What options do you
want in the car? It's time to start making some real choices.
An investment strategy is rarely black-and-white. Instead, investment strategies are usually a
mix of the different options available. My own experience has been that as my portfolio
grows, my investment options grow in direct proportion. In addition, the number of investment
strategies represented in my portfolio grows, also in direct proportion. Investment strategies, [ Pobierz całość w formacie PDF ]