How To Invest Lesson 3 - What makes a company valuable and what makes a stock a "Buy"?

n this WealthLift Presentation, you will learn:

What makes a company valuable?
What’s the difference between a great company and a great stock?
What are some other key indicators investors look at when valuing a specific stock?
How do you find the information you need about companies?

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Transcript

1. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. In this WealthLift video lesson, you will learn: • What makes a company valuable? • What’s the difference between a great company and a great stock? • What are some other key indicators investors look at when valuing a specific stock? • How do you find the information you need about companies? Lesson 3: What makes a company valuable and what makes a stock a "Buy"?
2. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. Lesson 3: What makes a company valuable? The Product Dell Inc. (DELL) – Computers and Computer Accessories General Electric (GE) – Aircraft Engines to Financial Products Bank of America (BAC) Banking & Financial Services
3. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. Lesson 3: What makes a company valuable? The Product • Who buys the product? What could affect the purchase of that product? • What makes the product profitable for the company? • Scalability is important
4. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. Lesson 3: What makes a company valuable? Competitive Advantage • Economies of Scale • Branding
5. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. Lesson 3: What makes a company valuable? Company Assets Tangible Assets Intangible Assets
6. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. Lesson 3: What makes a company valuable? Company Assets Net Assets Per Share = (Company Assets – Company Liabilities) ÷ No. Shares Outstanding
7. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. Lesson 3: What's the difference between a great company and a great stock? Earnings, or profits, add long term value to a company. Investors look at Earnings Per Share (EPS) Earnings Per Share = Company Earnings ÷ No. of Outstanding Shares
8. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. Lesson 3: What's the difference between a great company and a great stock? • The EPS of a company is a extremely important to investors • If the company issues more stocks, each shareholder owns a smaller part of the company, in what is known as stock dilution. • Investors look for a steadily rising EPS in companies.
9. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. Lesson 3: What's the difference between a great company and a great stock? Price-to-Earnings Ratio = Current Stock Price ÷ Earnings Per Share (EPS) Price-to-Earnings Ratio = $20 Stock Price ÷ $1 EPS = PE Ratio of 20 Price-to-Earnings Ratio (PE)
10. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. Lesson 3: What's the difference between a great company and a great stock? PE Ratio: 11.73 PE Ratio: 20.16 An investor pays $20.16 in Stock Price for every $1 of Google earnings An investor pays $11.73 in Stock Price for every $1 of Walmart earnings
11. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. Lesson 3: What's the difference between a great company and a great stock? The price paid for a company is just as important as the quality of the company Rule of Thumb: Market expects positive growth Market expects zero growth Market expects negative growth PE above 11 PE at 11 PE below 11
12. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. Lesson 3: What are some other key indicators investors look at to value a company? • The level of company debt, or liabilities, is very important • Debt accrues interest and increases chance of bankruptcy • Investors look at the Debt-to-Equity Ratio of a company
13. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. Lesson 3: What's the difference between a great company and a great stock? Debt-to-Equity Ratio = Company Debt ÷ Equity Debt-to-Equity Ratio Equity = Company Assets – Company Liabilities High Debt company Moderate Debt company Low debt company Debt-to-Equity above 1 Debt-to-Equity between 0.5 and 1 Debt-Equity below 0.5
14. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. Lesson 3: How do you find the information you need about companies? • Annual and Quarterly reports of companies • These reports are required by the Securities and Exchange Commission (SEC) • All reports are available online at the SEC Edgar Database • 10-K Annual Report is the most important document released by a company
15. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. Lesson 3: How do you find the information you need about companies? 10-K Annual Report contains:  Income Statement Company revenues and expenses  Balance Sheet Company assets and liabilities  Cash Flow Statement Company cash flows
16. Depictions of persons. product names and images modeled in this video are trademarks of their respective owners who do not endorse and are not associated or affiliated with WealthLift Inc. ©2011 WealthLift Inc. All Rights Reserved. In the next WealthLift video lesson, you will learn: • What is "Discounting”? • How do I use discounting to find undervalued stocks? • What is a margin of safety? Congratulations – Lesson 3 Completed