Business Project – Part 5 – Evaluating your Company’s Financial Position
Step 1 Get a copy of your companys annual report.
The Annual Report is a yearly statement of the financial condition, progress and expectations of the organization. This report is prepared by the financial accounting team and is reviewed by certified public accountants.
Locate and review the following elements of your companys annual report
Managements discussion and analysis of operations this essay or letter will give you a marketing version of the financial data. Remember this report is targeted for audiences outside of the company so this is the time when the company leaders celebrate the yearly accomplishments and give targets for the coming year.
Balance sheet This statement provides a view of the companys financial condition in relation to the assets, liabilities and owners equity.
Income statement This statement provides a view of the companys financial condition in relation to the firms profits after expenses and taxes.
Statement of cash flows This statement provides a view of the companys financial condition in relation to cash cash coming in as compared to cash going out.
Auditors opinion This statement is an independent evaluation of the companys financial positions after reviewing all of the statements.
Step 2 – Determine and note the company’s ticker symbol and stock exchange. Each company has a ticker symbol of three capital letters, assigned by the stock exchange where stock in that company is traded. This may be found in your Annual Report. While they sometimes resemble part of the company’s actual name, they may be completely unrelated.
Some publications will list the company’s full name alongside the letters. But for most stock tables and for tickers, you’ll need to know the three-letter symbol.
If you’re having a hard time finding the symbol, go to the company’s website. They’ll usually have it listed somewhere with other basic information about the company. You also can find out the stock exchange where that company’s stock is traded.
Step 3 Find your companys Stock Quote within the last 30 days There are numerous websites, both free and paid, that provide stock quotes for stocks traded on the different stock exchanges all over the world. Websites are especially valuable for international stock exchanges.
Typically, you can find more detailed information about how a stock is performing through an online financial service than you would on television or in a newspaper. Fortune Magazine website may also be a great source for this information.
Step 4 Now that you have collected all of the information, it is time to preparing your analysis Write down the information for each of the steps below this will be your actual submission.
Place a copy of the stock quote in your response, including the ticker symbol, used for this analysis at the top of your presentation. Make sure to note or highlight the date of the quote and the source of your quote.
What is the current price at the close of this business day? The current price is the price of one share at the close of trading the previous day. This price should only be taken as a guideline, because the price will continue to fluctuate even after the market has closed.
The price may be listed under the “day last” column of the stock table. It may not have a currently symbol next to it.
Find the earnings per share (EPS). The EPS is a measure of the current stock price compared to the earnings for the company over the last four fiscal quarters. It is calculated by dividing the net income of the company by the number of outstanding shares. Generally, the higher this number is, the better an investment that stock is.
You might see the initials EPS followed by “(tam).” This stands for “trailing twelve months,” and simply means that the EPS was calculated using the last 12 months’ figures.
Evaluate the price to earnings (P/E ratio).
What is the definition from your text of the P/E ratio?
You’ll see a number under “P/E” on a stock table. This represents the stock’s current price divided by the most recent EPS. The P/E can tell you if a stock is overvalued or undervalued.
If the P/E ratio is high, investors expect those higher earnings in the future. If the P/E ratio is low, expect less earnings from that stock. You can compare P/E ratios among companies in the same sector to find out which stocks are performing the best.
Check the stock’s volume. The volume is the number of shares traded in the most recent session (usually the last day). You also may see an average volume, which is the number of shares traded during a specific period. The length of that period varies among stock price report services.
In most cases, you want to avoid stocks with low volume. If the number is particularly low, check the average volume to see if it’s higher or lower than the average.
Find the High/Low column or Range. This column tells you the highest and lowest price at which the stock was traded that day. It gives you an idea of how volatile the stock is. The further apart the numbers are, the more volatile the stock.
Look at the market cap. Market cap, short for market capitalization, is the total value of the company. It is simply the total number of available shares in the company, multiplied by the current stock price.
The market cap gives you an idea about the general size of the company. The larger the cap, the more conservative the investment. Startup companies typically have a small cap, and are considered riskier investments.
Find the dividend. Some stocks pay equity directly to investors in the form of dividends. Generally, dividends are a sign of a healthy company, especially if those dividends have been increasing over time.
Dividends may be paid monthly, quarterly, once a year, or twice a year. If the dividend column on the stock table is blank or has a dash, that company didn’t pay dividends.
In some cases, dividends are reinvested, so each investor gets more stock instead of a cash payout.
Step 5 Analyzing your companys stock – Now that you have noted all of the data, lets analyze your companys financial position.
1. Compare price to value. The P/E ratio on the stock table can give you a good idea of whether the stock is a bargain. A relatively low P/E, typically under 15, tells you that the stock is selling more cheaply than it’s worth.
Check the P/E of competing companies in the same sector. If they’re all similar, that may tell you that the sector as a whole is undervalued. You may want to do some additional research to figure out why that is.
A high P/E isn’t necessarily a bad thing if you’re focused on long-term investments. Some stocks have a high P/E because they are expected to grow significantly within the next few years.
2. Determine whether the company is growing. Generally, if the company’s revenue is increasing, that means the company is growing and it probably is a good investment. Check the company’s revenue as well as its EPS.
If the EPS is high, your stocks will have a higher value. The company is potentially a good investment if the EPS has been steadily increasing over time.
3. Calculate the return on equity (ROE). Use the basic income statement from the company in the most recent annual report to calculate the Return on Equity (ROE). The ROE shows how efficiently the company is producing income for its shareholders. To calculate, divide the average shareholder’s equity during the past 12 months by the company’s net profit over the same period.
The ratio is expressed as a percentage, and can help you determine the overall profitability of owning stock in the company. Companies with ROEs that have been increasing for at least the past two years are the best investments when using the ROE as a measure.
4. Review expert analysis and research, including the annual report. If a stock is performing notably, experts analyze and produce reports on it to help investors. When you read stock quotes online, you’ll often find links to these articles on the same page.
**Now return to your annual reports and review the auditors letter at the end of the report. This along with the management letter will give you more detailed information about the company’s performance.
Step 6 Your recommendation now use the information you have just learned and calculated to answer the following questions.
Is your company growing?
Is your company a conservative or risky investment? Why?
Does your company pay dividends? Is it considered healthy as a result of this factor?
How profitable is your company?
Is this a good company to invest in? Substantiate your answer with the data that your found or calculated in this assignment
