In the previous post I took a look at two US companies using Ben Graham’s comparison table method.
Some of the features of the analysis may not have been understandable to some of you and so today’s post will make things a bit clearer by showing you the importance of each criteria and how you can use them to your advantage.
Below is the comparison table I used last time except there is no company information. Instead there is an explanation of each of Graham’s criteria and why they are important metrics for investors to assess a company with.
What is it? Important because...
1 Closing price The share price of the company at the time the stock market closed for the day This is how much you would need to pay for each share.
2 No of shares of common The number of shares the company has available for investors to buy or sell You need to know this figure so that you can understand the calculations of things like EPS, tangible book value per share and other per share results.
3 Market value of common Closing price multiplied by the number of shares the company has available for investors to buy or sell. Referred to as the 'market cap (capitalisation)' How much the company would cost you to buy as a 100% shareholder
4 Total non current liabilities incl. preferred stock Long terms debts and preferred/preference shares (shares that are a form of debt) All forms of debt that matter; if there is too much debt then the company could go bankrupt if they are unable to keep up payments.
5 Total revenues The total amount of sales a company has made How much the company was able to make from what it provides to customers
6 Net income The total amount of sales minus the costs such as taxes How much money the company has left from revenue minus the cost of making those sales
7 EPS this year (earnings per share) = Net income minus dividends of preferred shares divided by no. of shares of common How much the company generates in earnings if they were distributed among shareholders
8 EPS five years ago Earnings per share 5 years ago Did the company make more money this year than five years ago? As an investor you would hope so.
9 EPS ten years ago Earnings per share 10 years ago The same comparison but from ten years ago. Why so long ago? Why buy a company that is making the same or less amount of money than 10 years ago?
10 EPS five year average The average earnings per share over the last 5 years This nicely averages out the current year's EPS and all the positive EPS from the last five years. It allows you to compare growth figures between companies.
11 EPS ten year average The average earnings per share over the last ten years Same as above but for the ten year avergae.
12 Annual dividend The amount of cash the company pays for each share Companies that pay dividends are better than those that do not - in most cases.
13 Dividend since The year in which dividends were first paid to shareholders A long history of paying dividends is a sign of earnings stability and shareholders being well regarded by the management of a company.
14 Current assets Includes things like cash, money owed to the company from other companies, inventories, securities and other items that are reasonably expected to be turned into cash within one year. The most valuable part of a company's assets because they are the most 'liquid' i.e. if they are not already cash, they can very easily be turned into cash such as invesntories; they are sold in exchange for cash.
15 Current liabilities A company's debts that need to be paid within one year. The most pressing of debts that a company has to pay and always compared to current assets to ensure that the company can pay it short term debt with its short term assets.
16 Tangible book value per share total assets minus total liabilities minus goodwill and intangbiles divided by no of shares of common. This tells us how much each shares of stock is worth based on what the company has in value. We can then compare this with the closing price to see if the closing price is higher or lower.
17 Current PE ratio Closing price divided by earnings per share Ben Graham liked to buy shares in companies with low PE ratios - at the extreme end below 9, a bit more mildly between 12-15.
18 Average PE ratio The average PE ratio over a period of years This helps us to buy companies that are selling below their past PE average by comparing it to the current PE ratio (above).
19 Current ratio current assets divided by current liabilities Ben Graham asks newbie investors to buy shares of stock in comapnies with a current ratio above 1.5 for the daring and above 2.0 for the risk averse.
20 Price/tangible book value Closing price divided by tangible book value per share This tells us if the shares are trading above or below book value: anything above 1.0 is above book value. Simple.
21 ROE Net income divided by shareholders' equity Is a measurement of how well management can make money from the assets of the company.
22 Net profit margin Net income divided by revenue How much money a company makes from each $1/£1 it generates.
23 Dividend yield Annual dividend per share divided by closing price The % return a shareholder receives for the amount of dividend being paid by the company.
Notice how the vast majority of the analysis is company specific i.e. there is no mention of whether or not the wider economic environment will or will not have an impact on the future of a company.
The table focusses on the analysis of the company and its financial past and not the future in order for you to disregard companies who have proven themselves to be of little value or are currently overvalued.
I hope you enjoyed this quick post; it is a reference for you to review when you analyse your own companies or when I post table comparisons of companies to the Shares and Stock Markets Blog.
Bookmark this page now so that you can make a quick reference to it in future.
If you need further or better explanations of what items are in the table then drop me a line using the comments form below.
Thanks for reading the Shares and Stock Markets Blog and good luck with all of your investments.