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Some Famous Numbers
Peter Lynch gives a list of various numbers which are worth noticing:
- If you are interested in a company because of a particular product, the first thing you want to know is what that product means to the company. In other words, what percentage of the sales it accounts for that particular product.
- The P/E ratio of any company, which is priced moderately and has an equal growth rate of earnings, if it's less than the rate of growth, then it's a bargain because this is positive, whereas if it is twice the rate of growth, is negative.
- A quick and easy way of determining if a company is financially strong is to compare its debt to equity. This includes questions like, how much the company owes, and owns. There's funded debt and bank debt where the former is the worst kind and is also due on demand.
- Companies which are fast-growing and young and don't pay dividends are likely to grow much faster as they are ploughing money into expansion.
- Though book values are easier to find, one needs to have a detailed understanding of what they are.
- One can find several companies who carry assets at a fraction of their real value and the companies which have natural resources as their assets are usually more valuable than others.
- The amount of money a company takes while doing business is the cash flow of the company. Thus, a company that takes more cash is the one that is a better investment.
- A build-up in inventory is a bad sign, and if it grows faster than sales, then that is a worse sign. Thus, this is an aspect of a company that people must check.
- One must check if a company has an overwhelming pension obligation that they can't meet, especially in case of a turnaround
- Before investing, the investors must look at the ability possessed by a company to increase its earnings by raising prices and also by lowering costs. This is the growth rate which counts.
To conclude:
The author asks all the investors to have a focus on high profit-margins, in a stock which is long-term in nature and that one plans to hold through bad and good times as well, alongside a relatively low profit-margin in a successful turnaround.
