W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan

Sections 2, 3, and 4 of the NAIC Stock Study Guide  Sec. 2 - EVALUATING MANAGEMENT  Sec. 3 - PRICE-EARNING HISTORY as an indication of the future  Sec. 4 - EVALUATING RISK and REWARD

Sec. 2 - EVALUATING MANAGEMENT Sec. 2A - The ratio of pre-tax profit to sales (or revenue) Sec. 2B - The ratio of net earnings to equity

Section 2A Using S&P Sales and Pretax income are reported under Income Statement Analysis on the S&P Divide Pretax Inc. by Sales (Revs.) and convert to a percentage Example: 1999 Ratio of Pretax Profit to Sales for Lucent is (5,443 ÷ 38,303) x 100 = 14.21%

Section 2A Using Value Line Net Profit Pretax Profit = 1 - Tax Rate Ratio of Pretax Profit to Sales = Pretax Profit Sales

Sec. 2A Using Value Line - (Values in Millions)

Section 2A

Section 2B - The ratio of Net Earnings to Equity A = L + OE ASSETS = LIABILITIES + OWNERS’ EQUITY BALANCE SHEET: A snapshot of a company’s financial status at a given point in time.

TERMS ASSETS: everything that the company owns at that particular moment. LIABILITIES: everything that the company owes at that moment. Equity: the difference between the assets and the liabilities. This is the net worth of the company at that moment. Book Value: the company’s equity divided by the number of shares of stock.

Section 2B - The ratio of Net Earnings to Equity EPS % Earned on Equity = Book Value per share x 100 S&P … % Ret. on Equity Value Line … Return on Shr. Equity

Section 2B - The ratio of Net Earnings to Equity

Sec. 2 - EVALUATING MANAGEMENT

Sec. 3 - PRICE-EARNINGS HISTORY as an indicator of the future. Present Price, High this year, & Low this year. Column A - High Common Stock Prices Column B - Low Common Stock Prices Column C - Earnings per Share (EPS) Column F - Dividends per Share

Sec. 3 - Columns A, B, C, and F

PRICE/EARNINGS RATIOS (P/E): COLUMNS D & E P/E is the price of a share ÷ earnings of a share P/E is a way to measure what you are getting for your money when you buy a stock Example: A P/E of means investors are paying $50.00 for $1.00 worth of earnings.

PRICE/EARNINGS RATIOS (P/E): COLUMNS D & E Column D - Compute HIGH P/E Ratio by dividing high stock price (Column A) by EPS (Column C). Column E - Compute LOW P/E Ratio by dividing low stock price (Column B) by EPS (Column C).

COLUMNS D & E

Payout and High Yield Columns G & H PAYOUT - percentage of net income paid out in the form of cash dividends. YIELD - percentage of the purchase price one would receive in dividends. HIGH YIELD - yield one would have received had he purchased the stock at the lowest price each year.

Payout and High Yield Columns G & H Column G - Compute payout by dividing Column F by Column C (Dividend per share ÷ EPS). Multiply by 100 to convert to a percent. Column H - Compute High Yield by dividing Column F by Column B (Dividend per share ÷ low stock price). Multiply by 100 to convert to a percent.

Columns G & H

Compute the Averages Lines 6 and 7 Line 6 - TOTAL - Add the 5 years of figures for columns B, D, E, & G Line 7 - AVERAGE - Calculate the averages of the same columns by dividing the totals by 5.

Compute the Averages Lines 8 and 9 Line 8 - AVERAGE PRICE/EARNINGS RATIO Divide the sum of the High and Low P/E’s by 2, or ( 7D + 7E ) ÷ 2. Line 9 - CURRENT P/E RATIO Divide the present price from the top of section 3 by the sum of the EPS’s for the most recent four quarters.

Sec. 3 - PRICE-EARNINGS HISTORY Completed

WHAT DOES IT ALL MEAN? Price Trends Price Volatility Earnings per Share P/E Ratios Dividends Payout High Yield

End of Sections 2 and 3 QUESTIONS?