w.i.s.e. inve$tor$ club stock study guide sections 2 & 3 created by: marlene a. jordan
TRANSCRIPT
![Page 1: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/1.jpg)
W.I.S.E. INVE$TOR$ CLUB
Stock Study Guide
Sections 2 & 3
Created by: Marlene A. Jordan
![Page 2: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/2.jpg)
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
![Page 3: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/3.jpg)
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
![Page 4: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/4.jpg)
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%
![Page 5: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/5.jpg)
Section 2A Using Value Line
Net Profit• Pretax Profit = 1 - Tax Rate
• Ratio of Pretax Profit to Sales = Pretax Profit Sales
![Page 6: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/6.jpg)
Sec. 2A Using Value Line - (Values in Millions)
Row # Years 1994 1995 1996 1997 1998 1999 2000(E)
1 Net Profit 482.0 806.5 1054.0 1507.0 2287.0 3833.0 4775.0
2 Tax Rate 0.385 0.412 0.408 0.384 0.360 0.338 0.360
3 1 - Tax Rate 0.615 0.588 0.592 0.616 0.640 0.662 0.640
4 Pretax Profit (1÷3) 783.7 1371.6 1780.4 2446.4 3573.4 5790.0 7460.9
5 Sales (Revenues) 19765 21413 23286 26360 30147 38303 45000
6 Pretax Profit ÷ Sales
( 4 ÷ 5 rounded) 0.040 0.064 0.076 0.093 0.119 0.151 0.166
7 Pretax Profit as a %
of Sales 4.0% 6.4% 7.6% 9.3% 11.9% 15.1% 16.6%
![Page 7: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/7.jpg)
A %Pre-tax Profit on Sales (Net Before Taxes ÷ Sales) 4.0 6.4
1991 1992 1993 1994 1995
LAST 5YEAR AVG. UP DOWN
7.6 9.3 11.9 15.1 16.6 12.1
1999 2000TREND
1996 1997 1998
Section 2A
![Page 8: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/8.jpg)
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.
![Page 9: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/9.jpg)
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.
![Page 10: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/10.jpg)
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
![Page 11: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/11.jpg)
Section 2B - The ratio of Net Earnings to EquityB % Earned on Equity (E/S ÷ Book Value) 56.2
39.2 44.5 41.3 28.2 22.5 35.1
![Page 12: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/12.jpg)
Sec. 2 - EVALUATING MANAGEMENT
A %Pre-tax Profit on Sales (Net Before Taxes ÷ Sales) 4.0 6.4B % Earned on Equity (E/S ÷ Book Value) 56.2
1991 1992 1993 1994 1995
LAST 5YEAR AVG. UP DOWN
7.6 9.3 11.9 15.1 16.6 12.1
39.2 44.5 41.3 28.2 22.5 35.1
1999 2000TREND
1996 1997 1998
![Page 13: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/13.jpg)
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
![Page 14: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/14.jpg)
A B C D E F G HEarnings Dividend
per HIGH LOW per % Payout % High YieldHIGH LOW Share A ÷ C B ÷ C Share F ÷ C X 100 F ÷ B X 100
1 1996 13.3 7.4 0.41 0.042 1997 22.7 11.2 0.59 0.083 1998 56.9 18.4 0.87 0.084 1999 84.2 47.0 1.22 0.085 2000 84.18 49.81 1.50 0.106 TOTAL7 AVERAGE
8 AVERAGE PRICE EARNINGS RATIO 9 CURRENT PRICE EARNINGS RATIO
It is a bulding block for translating earnings into future stock prices.
PRESENT PRICE 58.31 HIGH THIS YEAR 84.18 LOW THIS YEAR 49.81
This show s how stock prices have f luctuated w ith earnings and dividends.
Year
PRICE Price Earnings Ratio
Sec. 3 - Columns A, B, C, and F
![Page 15: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/15.jpg)
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 50.00 means investors are paying $50.00 for $1.00 worth of earnings.
![Page 16: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/16.jpg)
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).
![Page 17: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/17.jpg)
A B C D E F G HEarnings Dividend
per HIGH LOW per % Payout % High YieldHIGH LOW Share A ÷ C B ÷ C Share F ÷ C X 100 F ÷ B X 100
1 1996 13.3 7.4 0.41 32.44 18.05 0.042 1997 22.7 11.2 0.59 38.47 18.98 0.083 1998 56.9 18.4 0.87 65.40 21.15 0.084 1999 84.2 47.0 1.22 69.02 38.52 0.085 2000 84.18 49.81 1.50 56.12 33.21 0.106 TOTAL7 AVERAGE
8 AVERAGE PRICE EARNINGS RATIO 9 CURRENT PRICE EARNINGS RATIO
PRESENT PRICE 58.31 HIGH THIS YEAR 84.18 LOW THIS YEAR 49.81
Year
PRICE Price Earnings Ratio
COLUMNS D & E
![Page 18: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/18.jpg)
Payout and High YieldColumns 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.
![Page 19: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/19.jpg)
Payout and High YieldColumns 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.
![Page 20: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/20.jpg)
Columns G & HA B C D E F G H
Earnings Dividend per HIGH LOW per % Payout % High Yield
HIGH LOW Share A ÷ C B ÷ C Share F ÷ C X 100 F ÷ B X 1001 1996 13.3 7.4 0.41 32.44 18.05 0.04 9.75 0.542 1997 22.7 11.2 0.59 38.47 18.98 0.08 13.56 0.713 1998 56.9 18.4 0.87 65.40 21.15 0.08 9.20 0.434 1999 84.2 47.0 1.22 69.02 38.52 0.08 6.56 0.175 2000 84.18 49.81 1.50 56.12 33.21 0.10 6.67 0.206 TOTAL7 AVERAGE
Year
PRICE Price Earnings Ratio
8 AVERAGE PRICE EARNINGS RATIO 9 CURRENT PRICE EARNINGS RATIO
PRESENT PRICE 58.31 HIGH THIS YEAR 84.18 LOW THIS YEAR 49.81
![Page 21: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/21.jpg)
Compute the AveragesLines 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.
![Page 22: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/22.jpg)
Compute the AveragesLines 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.
![Page 23: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/23.jpg)
Sec. 3 - PRICE-EARNINGS HISTORY
CompletedA B C D E F G H
Earnings Dividend per HIGH LOW per % Payout % High Yield
HIGH LOW Share A ÷ C B ÷ C Share F ÷ C X 100 F ÷ B X 1001 1996 13.3 7.4 0.41 32.44 18.05 0.04 9.75 0.542 1997 22.7 11.2 0.59 38.47 18.98 0.08 13.56 0.713 1998 56.9 18.4 0.87 65.40 21.15 0.08 9.20 0.434 1999 84.2 47.0 1.22 69.02 38.52 0.08 6.56 0.175 2000 84.18 49.81 1.50 56.12 33.21 0.10 6.67 0.206 TOTAL 133.81 261.45 129.91 45.747 AVERAGE 26.76 52.29 25.98 9.15
8 AVERAGE PRICE EARNINGS RATIO 39.14 9 CURRENT PRICE EARNINGS RATIO 38.87
PRESENT PRICE 58.31 HIGH THIS YEAR 84.18 LOW THIS YEAR 49.81
Year
PRICE Price Earnings Ratio
![Page 24: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/24.jpg)
WHAT DOES IT ALL MEAN?
• Price Trends• Price Volatility• Earnings per Share• P/E Ratios• Dividends• Payout• High Yield
![Page 25: W.I.S.E. INVE$TOR$ CLUB Stock Study Guide Sections 2 & 3 Created by: Marlene A. Jordan](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649e895503460f94b8d8f1/html5/thumbnails/25.jpg)
End of Sections 2 and 3
QUESTIONS?