Creating an Investment Worksheet - Part Three

This week is the final set of ratios for the worksheet (although I do want to cover some more complicated trend metrics next week as the final final part!).  The last couple of parts will focus on tracking and when to buy and sell. If you are just coming to the site now, I would suggest reviewing Parts One and Two of the worksheet (and any other posts under The Basics) to get a handle on what we are discussing. As noted, the worksheet is based on the teachings of Jason Kelly in his book The Neatest Little Guide to Stock Market Investing.

Here we go:

Sales and Earnings: How are sales and growth of the company expected to grow in the next three to five years? Jason Kelly likes to see large companies growing by at least 10% per year, medium companies by at least 15% and small companies by at least 20%. The higher the growth the better. Value Line appears to have recently restricted a great deal of its research to paid subscribers, so this information is no longer available on this site. However, Morningstar still appears to provide the 3-year revenue (same as sales) and earnings growth rates under the Key Ratios tab.

Projected Stock High/Low: This figure is what analysts are predicting will be the high and low price of the stock  in the future. Jason Kelly advises not to buy a stock whose price is projected to fall and to also look into whether the price is expected to rise enough to make it a worthwhile gain (i.e. is the price project to only  go up a few dollars?). Again, Value Line no longer supplies this information free of charge so you may have to do some digging to get this information. I found it on CNN Money but these sites appear to be changing regularly and starting to charge for a lot of this research.

Value Line Timeliness/Safety: While Jason Kelly discusses this ranking metric, again, it is no longer provided free of charge on the Value Line site. As there is no other place to grab this metric, unless you subscribe, you won't be able to put this on your worksheet.

S&P STARS (Stock Appreciation Ranking System)/Fair Value: This will take the stock you are looking at and see how it ranks on the S&P Stars/Fair Value ranking system. This is a ranking of what the stock’s price is as compared to what S&P considers fair value. A value of 5 is the best and means the S&P considers it undervalued and a bargain to buy. You are looking for stocks ranked 4 or 5. Again, unfortunately this material is becoming harder and harder to obtain free of charge. Jason Kelly says this information is posted in S&P’s The Outlook publication that is available at the library or through a broker. Both are not likely realistic for us to obtain. So, get creative and see what you can find for rankings through Google searches. I have found a ranking system that The Globe and Mail newspaper does so you could substitute something like this in for this metric.

Current Price to Earnings (Current P/E): Finally, back to a metric we are familiar with and more importantly, can actually find quite easily! By now, if you have been keeping up with the worksheets and the company profiles on the site, you will be familiar with this ratio. It is the stock price divided by the earnings per share. Lower is better for value investors as they want to pay as little as they can for each dollar of the company’s earnings. Growth investors are not as concerned with paying more as they are paying for explosive growth. Jason Kelly says the current P/E should be at or below the five-year average P/E. For value companies, the current P/E should equal the earnings growth rate. For growth companies, you don’t have to be as concerned. You can find this ratio on all the sites.

Average P/E: If this is not directly listed, all you need to do is add up the P/E for the last five years and divide by 5. You are looking to have the average P/E be higher than the current P/E.

Price to Sales (P/S): We are also well familiar with this ratio. As sales are less able to be manipulated by accountants in the same way earnings reports can, P/S can be a more accurate metric. This is calculated by current stock price divided by sales per share. Smaller is better (except for utilities companies says Jason Kelly) as you want to pay as little as you can for the sales generated by the company.

Price to Book (P/B): This figure compares the stock price with how much the stock is worth if the company was liquidated. How much are you actually paying for the company’s assets? Value investors like to see the figure at less than 1. Jason Kelly indicates he is not overly concerned with this ratio as he does not feel the auction price of equipment of the company is all that useful in evaluating the stock. Smaller is better here as well as a P/B of less than 1 means you are paying less than the auction price.

Current Ratio: This is a metric of the company’s short-term liquidity – current assets divided by current liabilities. The bigger the better here as it means the company has more assets than liabilities which is a good thing. It means it can meet any liabilities that may come due as it has more assets than debt. Morningstar has this information but you may need to search around. Currently, it is located under the “Full Key Ratios Data”.

Price to Cash Flow (P/CF): We are also familiar with this metric having used it in each of the company profiles on the site. This tells us how much you are paying for a share of the cash flow in the company. Many investors consider this an important measure; companies in good shape have a lot of cash (typically) and therefore the smaller of this measure the better as it means you are paying less for a share of the cash flow. As a rough guide, Jason Kelly likes to see this figure below 5. This figure is widely available on many of the sites we have already covered on the site.

That concludes the list of ratios for our worksheet. I will cover some last final metrics regarding charts and trends next week to round it out. 


**Top photo courtesy of Chris Barbelis at Unsplash