In many cases when you’re just starting out investing, you may only tend to look at the price of a stock. And it’s easy to forget that the number you’re looking at is directly tied to the company behind it. So to make a sound financial decision on an investment, you absolutely have to consider the company’s financial information.
But what do you need to do in order to not only find, but analyze these critical pieces of data?
In this article, I’m going to outline the key, need-to-know information about analyzing a stock table and chart. I’ll show you the numbers you need to worry about, walk you through looking at a basic stock chart, and set you up for going a little bit further.
Let’s dive right in.
What’s Ahead:
First, start with a good company
Forget the numbers for a minute. Yes, the data is important, but it’s only important if you’re investing in a good company. That means you need to understand the company’s products and services, the industry they are in (including market risks and competitors), and most importantly – their financial strength.
This is where value investing becomes important. To give you a quick recap, value investors like to look at the fundamentals of a company.
What I mean by this is looking at the overall value of the company itself – not just the stock or stock price. Are they in a lot of debt, or do they have a lot of cash? Are their sales increasing or decreasing? Do they have a good product that has long-term viability?
These are some of the questions you might ask. Apple is a great example – one I tend to use a lot. If you couldn’t see Apple’s stock price or any of their financial data – would you consider them a good company?
Probably.
Everyone seems to have Apple products (iPhones, iPads, etc.), and their marketing is fantastic.
So the next step down would be to examine if they’re profitable – this is where you’d take a look at their financial statements to see if they have debt, how their sales are trending, etc.
Then, once you can determine if you’ve found a good company to invest in, you’ll want to spend time understanding the more “advanced” data – what I’d call technical analysis. Don’t worry too much about this now, but this looks at things like the stock chart and other statistical data (once you get comfortable with the basics).
The main thing you should do is know and understand the company you’re investing in. And you can do this by looking at the information I’ll outline below, but also reading their company earnings reports and spending some time learning (if you aren’t picking up on this already – this isn’t a “get rich quick” guide – good investing takes time).
Next, understand “value”
Value can be measured in different ways, which I will explain more below, but first, you need to understand the difference between the different types of value.
Market value
Market value is the total value of the company’s stock. This is determined by looking at what’s called the market capitalization. To get this figure, you multiply the price per share by the number of shares outstanding. Basically, this tells you how “big” a company is.
Market value isn’t that helpful of a data point, though. It doesn’t tell you how risky an investment is – it just tells you how many shares are outstanding and what the “market” feels it’s worth – which could be based on speculation and people bidding up the price.
For example, here’s a snapshot of Apple’s market cap:
It’s $1.38T – which is high. It’s a huge company from a stock perspective, but what does that tell you about the investment potential? Almost nothing. Keep this one as a data point and nothing more.
Book value
Book value, on the other hand, is a much better piece of data to look at for beginners. In basic terms, the book value of a company is the difference between its assets (things like inventory, buildings, etc.) and liabilities (such as debt). It’s essentially like the net worth for companies.
In most cases, market value will exceed book value. But the closer they are, the safer the investment. If market value and book value were equal, for instance, it would be like the market saying the stock is priced appropriately based on its actual value. But stocks don’t work like that, primarily because humans are involved.
This isn’t to say you shouldn’t buy a stock that has a higher market value than book value – but it’s a data point you need to be aware of.
Intrinsic value
Intrinsic value is the value of the company’s tangible (i.e., production equipment) and intangible (i.e., technological innovations) assets would be worth if they were sold on the open market.
The calculation for this can get super complex, so for now, I’m going to somewhat ignore this.
Sales and earnings value
Two other ways of looking at value are the PSR (price to sales ratio) and the P/E (price-to-earnings) ratio. These are far more data-focused and they rely on the use of the company’s income statement. I’m going to cover these in a little more detail later.
Finally, know how to read the basics of a stock chart
Now that I’ve gotten the “pie in the sky” stuff out of the way, let’s take a look at a stock chart and break down what you need to know and why. This will help you leverage the data against the value of a company to start to make more intelligent investment decisions.
To start, here’s a snapshot of Apple’s stock chart from Google Finance. Come back to this often as I am going to reference it for the section below.
Stock price
The first thing you’ll notice is in the upper left corner of the chart – that’s the company’s stock price. It’s really important to note that this is just a snapshot in time. It changes constantly and if you’re going to buy a stock, the price you will pay will probably be slightly different.
In red, next to the stock price, you’ll see “-0.31” and “(.097%)” with a down arrow. This is to show that the price of the stock closed down 31 cents and is expressed as a percentage – .097%. It’s red because it closed below where it started. It would be green if it closed above. During the day, you’ll see this fluctuate up and down.
Quick reference data
Below the stock chart is what I would call quick reference data. It’s key metrics that a lot of people want to know right away, but they aren’t necessarily the most important. Here’s what you’re seeing:
- Open: this is the price the stock opened at on that day.
- High: a point-in-time snapshot of the highest price the stock reached that day. Remember, this will change throughout the day.
- Low: a point-in-time snapshot of the lowest price the stock reached that day. Once again, this will fluctuate.
- Mkt cap: the market capitalization of the company.
- P/E ratio: the price-to-earnings ratio. Many people use this as a quick reference for stock performance, but like all else, it’s just one data point. I’ll go deeper below.
- Div yield: the dividend yield, which is the percentage the company pays out as a dividend, in relation to the price of their stock.
- Prev close: the price of the stock the last time the market closed.
- 52-wk high: the highest price the stock has reached in the last 52 weeks.
- 52-wk low: the lowest price the stock has gone to in the last 52 weeks.
This data is helpful, but merely as a quick glance. You can’t pick a stock with just the information listed below, there’s too much data and information to be desired. Which leads to my next point – financials.
Financials
In this section, I’m going to walk you through the “Financials” section of Google Finance. Financials are a bit more advanced, but necessary if you want to see how the company is really doing. I’ve included screenshots below so you can follow along.
In Google Finance, Financials is the third tab over – but you can find this information with your online broker, too. I just prefer Google Finance because it makes life a lot easier, and I can get the key information I need, then go further with either my broker or through company earnings reports.
The first thing you’ll see on the Financials tab is a high-level overview of the company, including CEO, when it was founded, where it’s located, some of the smaller companies it owns, and the products it sells. Depending on the company, you might find more or less information here – the point is to just give you some quick information.
What I like most, though, are the Quarterly Financials. You can also find these figures – with FAR more detail – in a 10-Q company earnings report, which will come out quarterly for publicly traded companies.
The 10-Q is something that all publicly-traded companies need to produce every quarter, and it’s their way of reporting on how they’re doing – providing people who own the stock (such as you) insight into what’s going on.
Google Finance does a nice job extracting the basic information though.
Here’s a snapshot of what’s in Google Finance for Apple, and below I will break down what each of these means:
Let’s break each of these down so you can get a sense of what’s most critical.
Revenue
These are the company’s sales, without including any costs, like the cost of sales or other costs for running the business. It’s helpful for you to get a quick snapshot of sales, as well as how that number has trended over time, such as Y/Y (year-over-year).
For example, Apple might include the total number of sales it’s made on iPhones, iPads, laptops, monitors, and all its other products here – collectively.
Net income
Net income represents how much the company has earned, and it’s an excellent way to look at how profitable the company is.
You calculate net income by taking the company’s total sales and subtracting all costs to get a truer picture of a company’s actual earnings (in this case, during the quarter).
Remember that not all companies will have a net income – they may have a net loss (like Uber), which doesn’t always mean they’re a terrible investment, it’s just one data point.
Diluted EPS
EPS, or earnings per share, is a measure of the company’s net income, minus any dividends (money it pays back to its investors instead of reinvesting it), divided amongst the average outstanding shares (shares that are “out there” in the market). It’s a pretty common metric for looking at a company.
Diluted EPS, though, includes diluted shares, such as preferred shares (some people have special access to preferred shares), options, and warrants. It’s basically saying that if all shares were converted for sale and added to the total outstanding shares, that would be your new denominator.
(Net income – dividends) / (average outstanding shares + diluted shares)
Without getting too complex, you should absolutely be using Diluted EPS as a measuring stick for the company’s success.
You should see if it’s gone up or down, but the number in and of itself is somewhat meaningless. Meaning, some companies have a lower EPS if they pay large dividends, and some companies have higher EPS or lower EPS based on the industry.
What I’d suggest you do though is look at how the Diluted EPS has trended over YY (year-over-year) and the past two-three quarters. This should give you clues as to whether the company’s profitability is staying flat, going up, or going down.
Net profit margin
The net profit margin is the percentage of overall revenue that remains after expenses and preferred dividends. So basically, the formula looks like this:
(Net income / revenue) x 100.
I personally love looking at net profit margin, since it tells you the overall net profit as a percentage of the revenue. Like EPS and Diluted EPS, you can’t really compare across industries. You can somewhat compare within one industry, but I find it most useful to compare a company’s net profit margin to itself over time.
One thing I like to think about is if the net profit margin is low, it might mean that expenses are too high and the company needs to find new ways to drive those costs down to stay competitive.
Operating income
Operating income looks at the company’s operating profit after subtracting things like the cost of goods sold, wages, depreciation, and other operating expenses. This is a better number to look at than just revenue since it takes out the cost of running the business.
Revenue alone can be a mirage, but operating income brings things to a more realistic level. Also, because it doesn’t include taxes and interest, it can give you a cleaner look at the company’s overall operating performance.
Cash on hand
Simply put, this is how much a company’s cash has gone up or down in the reporting period. It’s a really nice barometer to see how much cash a company has on hand.
Cost of revenue
The cost of revenue is a line item on the income statement and tells you how much it costs a company to produce and distribute goods and services. You can’t use this piece of data in a vacuum, but it can lead to a lot of other valuable information.
For example, this number can tell you whether it costs a company more money to sell its products and services. If it is, this should prompt you to dig deeper to understand why.
Going back to two key ratios
The reason I wanted to hold off on going any further with two common ratios is that I think you need to understand a lot more before just blindly using them to determine the value of a stock.
Using a financial ratio can help you find the relationship between at least two pieces of data. Again, I don’t think the ratio by itself is that valuable, but it can add a ton of value by helping you get perspective or meaning behind a specific financial figure.
For instance, if you’re blindly looking at a company whose earnings are $50 million. Maybe that sounds incredible, but what if their competitors are bringing in $1 billion in earnings each year? A ratio can help put figures like this into perspective.
So the two key ratios I want to focus on are price-to-earnings (P/E) ratio and price-to-sales (PSR) ratio.
P/E ratio
The P/E (price-to-earnings) ratio plays a critical role in analyzing an investment when used correctly. It provides a nice snapshot of the company’s overall value, and it’s a ratio that is typically front and center on the stock chart (like you saw above). What I like about the P/E ratio most is that it gives you a correlation between the company’s stock price and its net profit.
In the ratio, P is the stock price of the company, while E is the earnings per share. The EPS in this formula is most commonly the previous 12 months of earnings. You may also hear the phrase “multiple” or “earnings multiple” when analyzing stocks – this is just another way of saying the P/E ratio.
The P/E ratio is calculated by dividing the stock by the EPS:
Stock price / EPS = P/E ratio.
So to use a very simple example, if the stock price is $100 and the earnings per share is $2.00 then the P/E would be 50:
100 / 2.00 = 50.
Now, say the stock price went down to $80 for some reason, it tanks 20%. Also, assume earnings per share does not change. Your EPS suddenly becomes 40.
So what exactly does this mean and why does it matter?
The lower the P/E, the less you’ll pay for a company’s earnings. The inverse is true, too. If that $100 stock went to $120, your P/E is now 60 – causing you to have to pay more for those same earnings.
So should you always look for a low P/E?
No – not at all. And this is why I wanted to share this with you last. It’s dangerous to use a single metric like the P/E ratio to determine whether or not to buy a stock. You have to look at the company as a whole and remember this is just a single piece of data for your overall analysis.
That being said, there are times where a higher P/E makes sense. Perhaps the company is in a high-growth industry and you anticipate earnings to grow even more in the future. Then it really doesn’t matter, but you are opening yourself up to more risk if the company does not meet those earning expectations.
That said, you can use two sub-ratios to help make more informed decisions. Trailing P/E is what you’ll most often see quoted since the data is current. Trailing P/E uses the last 12 months of earning data in its calculation. Forward P/E on the other hand is based on projections 12 months in the future. It’s purely just an estimate, so you have to take it with a grain of salt.
P/E is just a way to compare whether a stock is over or undervalued. A follow-up step should always be to compare it to something else – either the company’s prior P/E ratios or other companies in the same industry (or both!).
PSR
PSR (or price-to-sales ratio) takes the company’s stock price and divides it by total sales. But to make things easier (since the stock price isn’t expressed on a per-share basis) you can also get PSR by using the market value of the stock (discussed above) and dividing it by total sales.
For example, if a company has a market value of $500 million and it’s sales are $1 billion, your PSR would be 0.50 (500,000,000 / 1,000,000,000 = 0.50). In general, you want to see a PSR below $1 (but like any other ratio, this doesn’t always apply).
What this means, using my example, is that you could buy $1 of the company’s sales for $0.50. So using this ratio BY ITSELF would tell you the stock is a bargain (again, I can’t harp on this enough – it’s only one piece of information).
Now, when you start to use PSR against all the other things you’ve learned in this article, you should start to come away with a pretty good picture of a company’s overall value.
Summary
If you’ve made it this far, congratulations! While this doesn’t cover everything you need to know, it should give you a pretty good start in starting to analyze a company’s value by using basic stock charts.
Your next step is to read my article on reading a stock chart more comprehensively – this will give you an idea of how to analyze the ebbs and flows of a company’s trending price over time.
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