| Just a reminder to all of us, as to why we are patiently struggling along and not giving up: Charles B. Carlson in his book Eight $teps to $even Figure$ reports "The millionaire investors I surveyed are largely do-it-yourself investors. They call their own shots."
Can we all be guaranteed to become millionaires by investing ourselves? Unfortunately, no. However, it's a nice goal to keep in mind.
And as a goal, it certainly works for me, so let's keep plugging along.
Last week we left off with the following definition of value investing per InvestorWords "An investment style, which favors good stocks at great prices over great stocks at good prices. Utilizes such valuation measures as price to book ratio, price/earning ratio and yield."
Let's define the following terms first: valuation and price to book ratio, all from InvestorWords.
Valuation is "The process of determining the value of an asset or company." So now it appears that we're getting into the actual nuts and bolts…the dollars that our companies are worth, which they have to report to us as investors, or potential investors.
Price to book ratio is defined as "A stock's capitalization divided by its book value. The value is the same whether the calculation is done for the whole company or on a per-share basis."
Capitalization definition first. "The sum of a corporation's long-term debt, stock, and retained earnings also called invested capital. Invested capital is defined as "an amount received in exchange for equity capital". Equity capital is defined as "Money a company earns by selling shares of it's stock".
And before I lose you into the abyss of confusion, you're not going to believe what all this mumbo-jumbo boils down to. If I take the total number of shares available from a company and multiply that number by the price of each share, I can figure out the total value of the company. This is capitalization…I hope.
I feel one of those hair-pullers coming on. Take a deep breath. For the second part of price to book ratio definition, book value is "A company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill".
The balance sheet is included in the financial statement, which is "A written report, which quantitatively describes the financial health of a company. Includes an income statement and a balance sheet".
Okay. I just did a Web search for an online company and under "Investor Relations" I found all the numbers I needed. This can also be found online through financial statements and company profiles. After all the hair-pulling and definitions, I now find that the Price to Book Ratio is listed right on the summary sheet. So…at least now we know how to calculate the darn thing.
So…what does it mean? About.com http://stocks.about.com/finance/stocks/library/analysis/bl_pb.htm for beginning investors has a nice explanation that helped me understand this concept. Using this ratio to purchase stocks, as mentioned by this web site, is less the norm nowadays. It appears that for the new technology and Web companies, this is not as valid a predictor as once thought. And why do we need this number? According to the About.com article " Investors searching for bargains try to buy stocks near, or below, their book value."
And for me another break through. I can use this number to compare it to the stock price offering and decide if it's a good deal.
And I just checked an online company whose stock is priced at $41.00 and its price to book ratio is listed at $2.50. Is this a good deal? I just don't know yet, but I now know what a price to book value is, what it means, and how to use it.
And, also just a reminder…I'm trying to become value investor by picking good stocks at great prices OVER great stocks at good prices.
There is a big difference. I'm attempting to seek out a "good" stock by crunching some numbers. I've got one number so far…the price to book ratio. And if I can't locate it quickly on a company's summary sheet or fundamentals sheet, then I have also learned how to calculate it myself. (I would encourage you to search very long and very hard for that amount to avoid having to calculate it yourself).
Next week I return to the P/E ratio and yield, both of which I hope will improve my abilities to purchase a stock beyond looking at just its price.
Thank you for joining me,
Joyce |
