Analyzing the company's financial results (P/E, P/B, price/sales)

Every investor should've heard a name Warren Buffet at least once. But only few are familiar with his the tactics of choosing his investments. The world's richest man/investor has his own ways.
When all the bankers suggests to diversify the risk and buy different stocks from different sectors, Mr. Buffett figures, he should put all his eggs into one basket. Which means that he understands the company, he's investing into, very thorough. By reading company's financial statements, getting to know the board of directors and managers and of course, about the company's products. That's the way he has an average 20% yield in a year, for his 60 years in business. It seems easy, but I certainly believe, It's very difficult to do and even more difficult to learn.

But to start, I will try analyzing the one company that probably has been written about by every business newspaper - Apple Inc.

Apple has been having lots of difficulties in the last year and though many analysts have their opinions, I want to follow one of Buffett's rules - be independent. Here's the 2012 annual report. Lots of data, our job is to find the important parts : http://investor.apple.com/secfiling.cfm?filingID=1193125-12-444068

Apple 2012 financial data.

*will mark (million) in replacement for 1 000 000  in sake of better understanding.

P/E (price to earnings ratio)
Market Value per ShareEarnings per Share (EPS)
431.72 (current share price)  
Earnings per share 44.64 . 

P/E = 431.72 (current share price) / 44.64 (earnings per share) = 9.67

•  Normal P/E is 10-30, less is underrated and over is overrated. Which means, by P/E Apple's current share price is too low and should be higher. It indicates the present price and company result ratio. But it's very important to compare the P/E to other technology sector companies! 

*retained earnings - The percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business or to pay debt. Money coming from earnings of the company and invested back to business either for loans or development. Gives information about company's intentions for growth in the future.

P/B (price to book or price-equity ratio)



431.72 (current share price)  

Total assets 176 064 (million) 
Intangible assets (Acquired intangible assets + Goodwill) 5 359 (million)
Total liabilities 57 854 (million) 

176 064(million; total assets) - 5 359 (million; intangible assets) - 57 854 (million; total liabilities) 
                                                    / 938.75 (million; shares total) = 120.2 (Book value per share)

P/B = share price / book value per share = 431.72 / 120.2 = 3.6

•  This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately.If a company is trading for less than its book value (or has a P/B less than one), it normally tells investors one of two things: either the market believes the asset value is overstated, or the company is earning a very poor (even negative) return on its assets. 

        Normal P/B is 1 to 1.5. For long-term investment, below's underrated, above is overrated.

        


*intangible assets - An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace.

*liability - includes loans, accounts payable, mortgages, deferred revenues and accrued expenses. Liabilities are a vital aspect of a company's operations because they are used to finance operations and pay for large expansions.

Price / Sales

431.72 (current share price)  

12-month (2012) Revenue aka net sales 156 508 (million)
Shares total 938.75 (million)

Revenue (net sales) per share = 156 508 (million) / 938.75 (million) = 166.7 

PSR = 431.72 / 166.7 = 2.6

* price/sales - the price-to-sales ratio can vary substantially across industries; therefore, it's useful mainly when comparing similar companies. Because it doesn't take any expenses or debt into account, the ratio is somewhat limited in the story it tells.

Today's analysis conclusion

According to Yahoo! Finance's data, 
P/E = 9.79
P/B = 3.17
PSR = 2.46

Looks like self-made calculations might be more fresh and accurate. Simply because the data on 
internet sometimes could not be the right and might sometimes be a little out-of-date.
In next post we'll go deeper in anaylzing and take on next concepts.


What is going on with my portfolio?

• First, my long-term stocks :

C +11.2% 

F  -3%

PFE +8.7%

Average +5.63%

In comparison, S%P 500 has risen 10% in last 3 months (the time I've been writing this blog and starting this test between long-term and short-term stocks). I'm still behind the index, which shows a great lack of skill in choosing stocks. But important is developing yourself.

• My speculation stocks : 

ITMN -2.6% will sell, because price/sales is 23 and p/b 9.2 and p/e cannot be calculated when there's no profit. Also, nothing to wait for in the future.

SBUX +9.4% will hold - p/e 31.6, p/b 8.4, price/sales 8.2 - though these indicators are a little too high, I believe in this brand, because with economic growth people are willing to spend more and also it has a steady bullish trendline.

Average +3.4% 

S&P 500 has risen 10%

Still, the long-term stocks have been better. I will search for the new bunch of short-term stocks for the next time.