Name ______________________________ Date ...



Name ______________________________ Date ___________________ Period ______

How Do You Analyze A Corporation?

In this lesson, you will find out how to use annual reports to analyze a corporation whose stock you may consider buying for the Stock Market Project.

All publicly traded companies are required by the Security and Exchange Commission (SEC) to publish an annual report that shows the company’s financial performance for the past year. Most annual reports are quite technical and require a basic knowledge of financial accounting. This lesson takes a simple approach so you can understand some key financial data on the income statement and balance sheet. Analyzing these key data, you can determine a company’s financial strength and weakness. You will come away with an understanding of the financial health of a company before choosing a stock to purchase.

Activities:

ALL WORK BELOW MUST BE HANDWRITTEN

AND NOT TYPED!!!

1. You need to get a copy of an annual report online. You should do this for each company you plan to invest in, but for this activity you need to examine the annual report of at least two (2) of the companies you selected in the previous activity – “How Do You Pick Winners In The Stock Market.” Most large companies like Intel and Cisco, for example, post their annual report under the investor relations section of their corporate home page, which you can get from Yahoo Finance under the PROFILE link.

**With each Annual Report PRINT ONLY THE 2-3 KEY PAGES OF THE REPORT!!!]: - Annual Reports can be 100 – 200 or more pages long!!!

2. Go to and WATCH the video AND READ the information below to understand the key points in an annual report.

3. EPS, the most watched figure by investors, shows the profits for each share of stock. Select one of the companies that you would consider investing in and go to YAHOO FINANCE and enter the stock symbol. Under the “SUMMARY” link it will give you the EPS for the company you have selected.

• Company symbol selected: __________ EPS of company: __________

• Explain what EPS is and why it is the most watched figure by investors:

4. Next, analyze the company’s balance sheet (click on the “BALANCE SHEET” link from the “FINANCIALS” link), which shows what the company is worth. A balance sheet consists of three key elements: assets (how much the company owns), liabilities (how much the company owes), and stockholder’s equity (assets minus liabilities). Also, stockholder’s equity consists of two parts. The first part is the value of the stock the company sold to investors. The second part is the money from net earnings over the years. You should understand that the balance sheet shows the financial health of a company. If the company owes more than it owns (liabilities are greater than assets), the company could potentially go bankrupt soon.

• Company symbol selected: __________

• Stockholder Equity of company: __________________________

• Would you invest in this company right now? YES or NO

5. To calculate key the price-to-earnings ratio (p/e):

-Find the Share Price using the current share price for the stock.

-Find the Earnings Per Share use the current Earnings Per Share for the stock. Use the following website: and insert the stock symbol, scroll down “MORE STATISTICS” [on the right side of the page]

Note: The higher the P/E, the more expensive the share price. P/Es for the S&P 500 range from 20 to 30.

ANSWER: ________________________________

SHOW ALL WORK:

PRINT THE INCOME STATEMENT AND BALANCE SHEET FOR ONE OF YOUR STOCKS to answer questions 6 – 8 below!!! – Use Yahoo Finance under the “Financials” link

6. To calculate Net Profit Margin use the “Income Statement” on the “Financials” link of Yahoo Finance

Note: The higher the profit margin, the better. Not many companies have a margin over 20%, but Microsoft and Intel are two exceptions.

ANSWER: ___________________________%

SHOW ALL WORK:

7. To calculate the Return on Equity (ROE)

-Use the “Income Statement” on the “Financials” link of Yahoo Finance to find Net Income

-Use the “Balance Sheet” on the “Financials” link of Yahoo Finance to find Stockholder’s Equity

Note: The higher the ROE, the better. An ROE over 20 indicates a strong competitive position in the business.

ANSWER: ________________________%

SHOW ALL WORK:

 

8. To find Debt to Equity Ratio (D/E), use the “Balance Sheet” on the “Financials” link of Yahoo Finance to find both the Long-term Debt and the Stockholder’s Equity

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Long-term debt means the amount borrowed by the company that will be paid back in a time period over one year.

Note: A D/E of 25% or less is considered safe while above 50% means the company has been borrowing too much money and runs a risk of not meeting loan payments.

ANSWER: ______________________%

SHOW ALL WORK:

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Price-to-earnings ratio (P/E)

P/E = Current Share Price / Earnings Per Share

Net Profit Margin

Margin = Net Income / Revenue X 100

Return on Equity (ROE)

ROE = Net Income / Stockholder’s Equity X 100

Debt to Equity Ratio (D/E)

D/E = Long-term Debt / Stockholder’s Equity X 100

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