Chapter7AnalyzingCommonStocks121

Chapter7
AnalyzingCommonStocks
Outline
Learning Goals
I.

SecurityAnalysis
A) PrinciplesofSecurityAnalysis
1. TheTopDownApproachtoSecurityAnalysis
B) WhoNeedsSecurityAnalysisinanEfficientMarket?
ConceptsinReview

II.

EconomicAnalysis
A) EconomicAnalysisandtheBusinessCycle
B) KeyEconomicFactors
C) DevelopinganEconomicOutlook
1. AssessingthePotentialImpactonSharePrices
2. TheMarketasaLeadingIndicator
ConceptsinReview

III. IndustryAnalysis
A) KeyIssues
1. TheIndustryGrowthCycle
B) DevelopinganIndustryOutlook
ConceptsinReview

122Gitman/JoehnkFundamentalsofInvesting,NinthEdition

IV. FundamentalAnalysis
A) TheConcept
B) FinancialStatements
1. TheBalanceSheet
2. TheIncomeStatement
3. StatementofCashFlows
C) FinancialRatios
1. WhatRatiosHavetoOffer
2. MeasuringLiquidity
a. CurrentRatio
b. NetWorkingCapital

Chapter7AnalyzingCommonStocks123

3. ActivityRatios
a. AccountsReceivableTurnover
b. InventoryTurnover
c. TotalAssetTurnover
4. LeverageMeasure
a. DebtEquityRatio
b. TimesInterestEarned
5. MeasuringProfitability
a. NetProfitMargin
b. ReturnonAssets
c. ReturnonEquity
6. BreakingDownROAandROE
a. GoingfromROAtoROE
b. AnExpandedROEEquation
7. CommonStockRatios
a. Price/EarningsRatio
b. DividendsperShare
c. PayoutRatio
d. BookValueperShare
D) InterpretingtheNumbers
1. UsingHistoricalandIndustryStandards

124Gitman/JoehnkFundamentalsofInvesting,NinthEdition

2. LookingattheCompetition
ConceptsinReview

Summary
PuttingYourInvestmentKnowHowtotheTest
DiscussionQuestions
Problems
CaseProblems
7.1 SomeFinancialRatiosAreRealEyeOpeners
7.2 DorisLooksatanAutoIssue
ExcelwithSpreadsheets
TradingOnlinewithOTIS

Key Concepts
1.

Anoverviewofthesecurityanalysisprocess,includingitsgoalsandthefunctionsitperformsforthe
individualinvestor.

2.

Theroleandimportanceofeconomicinthestockvaluationprocess.

3.

Theroleandimportanceofindustryanalysisinthestockvaluationprocess.

4.

Theconceptoffundamentalanalysisandhowitisusedtoassessacompanysfinancialpositionand
operatingresults.

5.

Thevarioustypesofaccountingstatementsandfinancialratiosusedinevaluatingthehistorical
performanceofacompany.

6.

Anoverviewoffundamentalanalysisatwork,includingtheneedtoevaluatecompanyperformance
againsthistoricalandindustrystandards,andhowsuchcomparisonsformthebasicinputforthe
valuationprocess.

Overview
Thischapterandthenexttwoanalyzeprinciplesandconceptsofsoundcommonstockinvesting.
1.

Theprinciplesofsecurityanalysisarefirstpresented,beginningwiththethreebasicingredientsof
anyviableanalysis:(1)gatheringrelevantinformation,(2)organizingitintoalogicalframework,
and(3)determiningtheintrinsicvalueofthestock.Knowledgeoftheintrinsicvalueofastockis
importantininvestmentdecisionmaking.Aninvestorcandecidewhetherastockisovervaluedor
undervaluedrelativetothemarketpriceonlyifheorshehasanindicationoftheintrinsicworthof
thestock.Attentionshouldbepaidtotheneedforsecurityanalysisinanefficientmarket.

Chapter7AnalyzingCommonStocks125

2.

Thenextsectionlooksattheinformationgatheringprocessindetail.Theinstructormightmention
thatinformationforsecurityanalysisisusuallycollectedandanalyzedinatopdownfashion,inthis
order:economicanalysis,industryanalysis,andfundamentalanalysis.
(a) Economicanalysisusuallytakesboththeeconomyandthestockmarketintoaccount.Key
factorsthataffecttheeconomyare:governmentalregulations,monetaryandfiscalpolicies,
inflation,spendingbyconsumersandbusinesses,andforeigntrade/balanceofpayments.These
keyeconomicindicatorsshouldbementionedinclass.Studentsshouldrealizethatonlyafter
assimilatingthisinformationcantheinvestorprepareaneconomicoutlook.Specificreportson
thestateoftheeconomy(asnotedinthetext)shouldbementioned.
(b) Thekeyfactorsthatbearonindustryanalysisareconsiderednext.Again,theinstructorshould
mentionspecificsourcesofpublishedreportsonindustryoutlooks.
(c) Fundamentalanalysisistheanalysisofaparticularcompanyandisdescribedbelow.

3.

Inordertodocompanyanalysis,relevantfinancialstatementsarerequired.Themostimportantof
thesearethecompanysbalancesheetandincomestatement.Theusefulnessofthesefinancial
statementsinrevealinginformationaboutthecompanyunderconsiderationshouldbeemphasized.
Thecomponentsofboththebalancesheetandtheincomestatement,andexactlywhattheymeasure,
shouldbeindicated.TimeshouldalsobespentdescribingtheStatementofCashFlowsandhowit
canbeusedbyinvestorstoassessthefirmsliquidityposition.Bringinginfinancialstatementsofa
popularorlocalcompanytypicallymakesthissegmentofthecoursemorerealistic.

4.

Ratioanalysisprovidesinsightsintotheperformanceofacompany.Theinstructorshouldpointout
thatthehistoricalratiosofacompanyreflectpastperformance.Also,comparingthecompanys
ratioswithindustryratiosandwithratiosofsomeofitsmajorcompetitorsshowshowaparticular
companyperformedincontrasttotheperformanceofothercompaniesinsimilarbusinesses.The
classsunderstandingoftheproceduresforcomputingandinterpretingratiosshouldbechecked,and
theexampleinthetextshouldbereviewedthoroughly.

5.

Theseadditionalpointsmightalsobementionedinclass:
(a) Inallthreetypesofanalysis,theinvestordoesnotcomeupwithanumber,butinsteadageneral
vieworoutlook.
(b) Allanalysesofpastperformanceonlyhelpingeneratingestimatesforthefuture.
(c) FurtherdevelopmentofthischaptersconceptsfollowsinChapter8.

Answers to Concepts in Review

1.

Thethreemajorpartsofsecurityanalysisareeconomicanalysis,industryanalysis,andfundamental
analysis.Securityanalysisisimportantbecauseitenablestheinvestortoestablishtheexpectedreturn
andriskforastockandtoevaluateitsdesirabilityinalogical,rationalmanner.

2.

Intrinsicvalue,theendproductofsecurityanalysis,isthemeasureoftheunderlyingworthofastock
andprovidesastandardforhelpinginvestorstojudgewhetheraparticularstockisundervalued,
fairlypriced,orovervalued.Iftheintrinsicvalueofastockismorethanthemarketprice,thenthe
stockmightbeagoodbuyundertheassumptionthatthestockwillriseuptoitsintrinsicvalue.The
conversewouldbetrueiftheintrinsicvalueislessthanthestockprice.Thestockmightbeagood
sell.

126Gitman/JoehnkFundamentalsofInvesting,NinthEdition

3.

Asatisfactoryinvestmentvehicleisonewhichoffersanexpectedreturn,fromthecombinationof
currentincomeandcapitalgains,thatiscommensuratewithitsperceivedexposuretorisk.Thethree
stepsinsecurityanalysisshouldenableinvestorstoidentifysatisfactoryinvestmentvehicles.First,
economicanalysisassessesthegeneralstateoftheeconomyanditspotentialeffectsonsecurity
returns.Industryanalysisexaminesspecificindustriesandthecharacteristicsandoutlookofthose
industries.Finally,fundamentalanalysislooksatthefinancialconditionandoperatingresultsofa
particularcompanyindepth.Together,theyenabletheinvestortodevelopexpectationsabouta
stocksfuturecourseofbehaviorwhatkindofreturntoexpectandwhatkindofriskislikelytobe
involved.Byexaminingvariablessuchasfutureearnings,dividends,andsoon,thesecurityanalyses
processallowsinvestorstodevelopafeelforthestockandwhattoexpectofitinthefuture.

4.

Ifthestockmarketisefficientinthestrongestform,thensecuritiesareneversubstantiallymispriced
andhencetherewouldbenoneedforsecurityanalysis.Butinreality,thefinancialmarketsarenot
perfectlyefficientandpricingerrorsareinevitable.Withthoroughsecurityanalysis,individualscan
profitwheneverpricingerrorsoccur.Paradoxically,financialmarketefficiencyisachievedonlydue
totheexistenceoftraderswhoinvesttimeandmoneyinfundamentalanalysistorootoutpricing
errors.Securityanalysisisalsousefulinassessinganassetsliquidity,currentincome,andriskandin
verifyingthatthesematchinvestorcriteria.

5.

Economicanalysisinvolvesstudyingtheunderlyingnatureoftheeconomicenvironmentinwhicha
firmoperates.Economicanalysisalsohelpstheinvestorformexpectationsaboutthefuturecourseof
theeconomy.Suchananalysiscouldbeadetailedexaminationoftheeconomy,sectorbysector,orit
maybedoneonaveryinformalbasis.Inanyevent,itdealswithsuchaspectsasproductionand
unemploymentstatistics,inflation,fiscalandmonetarypolicies,andtheireffectsonsecurityreturns.
Thisanalysisis,indeed,essentialtoaninvestorsdecisionmakingframework.Weliveinan
economywherefirmsareaffectedbygeneraleconomicconditions;therefore,wecannottalkof
securityanalysiswithoutaddressingeconomicanalysis.Theresplentyofrealworldevidenceto
demonstratethehighcorrelationbetweentheperformanceofstocksandgeneraleconomic
activityi.e.,whentheeconomystartsimproving,sodostockreturns,allofwhichindicatethe
importanceofeconomicanalysistothestockselectionprocess.

6.

Thebehaviorandcurrentstateoftheeconomyiscapturedinthebusinesscycle,whichmeasuresthe
changeintotaleconomicactivityovertime.Wheneconomicprospectsarestrong(thebusinesscycle
isonanupswing),securityreturnsshoulddowell.Ifeconomicprospectsarepoor(thebusinesscycle
isonadownswing),thereturnsfrommoststockswilldeteriorateaswell.

Chapter7AnalyzingCommonStocks127

7.

(a) GrossDomesticProduct(GDP):Thisisthebroadestmeasureofaneconomysperformance.
GDPisanestimateofthetotalvalueofallgoodsandservicesproducedinacountryoverthe
periodofayear.
(b) LeadingIndicators:Thisisanindexthatcombinesthebehaviorofadozenkeymeasures,eachof
whichtendstobeanindicationofthingstocomeintheeconomy.Theindexofleadingindicators
isasinglenumberthatissupposedtopredictthedirectionoftheeconomy.
(c) MoneySupply:Thisisameasureoftheamountofmoneyincirculationasreportedbythe
FederalReserve.Actually,therearethreemeasuresofthemoneysupply:M1,M2(whichisthe
mostwidelyfollowedandincludescurrency,demanddeposits,NOWaccounts,timedeposits,
moneymarketdepositaccounts,andmoneyfunds),andM3.
(d) ProducerPrices:Thisisameasureofpricebehavioratthewholesalelevel.Itshowstherateof
changeinpricesatvariousstagesofproduction,andissupposedtobeaharbingerofthingsto
comeattheconsumerpricelevel(i.e.,futureinflationrates).

8.

Theeffectsofhighratesofinflationoncommonstockscanbedevastating.Ininflationarytimes,the
qualityofearningsdeclinesasprofitmarginsaresqueezedandthepurchasingpowerofthedollar
deteriorates.Anincreaseininflationresultsinanincreaseininterestrates.Hencethecostof
borrowingoffirmsincreasesresultinginlessinvestments.Also,asinterestratesrise,thereturnon
commonstocksbecomeslessattractiverelativetoothersecurities,likebondsandpreferredstocks.
However,wheninflationsubsides,commonstocksbecomemajorbeneficiaries,showingsubstantial
priceappreciation.

9.

Industryanalysisisthepartofthesecurityanalysisprocessinvolvingthestudyofstocksintermsof
theirindustrygroupings.Industryanalysisisimportantbecausestockpricesareinfluenced,atleastin
part,byindustryeffects.Industryanalysiscanbeusedtoestablishthecompetitivepositionfora
particularindustryandtoassessthenatureoftheopportunitytheindustryoffersforthefuture.Italso
enablestheinvestortoidentifypromisingfirmsinanindustry.

10. Someimportantaspectsofindustryanalysisinclude:
(a) Thenatureoftheindustry:whetheritismonopolisticorcompetitive.
(b) Theextentofregulation:whetherregulationisminimalorintense.
(c) Theroleofbiglabor:thestatusofcontracttalksandgenerallaborregulations.
(d) Technologicalprogress:areanytechnologicalbreakthroughslikely?
(e) Financialandoperatingcharacteristics:considerationsinvolvinglabor,material,andcapital.
Economicforcesimportanttotheindustryincludethedemandfortheindustrysgoodsandservices
andthecorrelationwithkeyeconomicvariables.Totheextentthatanindustryisinfluencedby
economicforces,wewouldwanttodeterminetheeconomicvariablesthatareofprimaryimportance
toanindustry;itmightbeGDP,orthelevelofinterestrates,ortheunemploymentrate.Also,the
futureoutlookforthesevariableswouldbeimportantsincetheyarelikelytosetthetoneforfuture
industryperformance.
11. Thefourstagesofanindustrysgrowthcycleare:
initialdevelopmentproductintroduction
rapidexpansioneveryonewantsone
maturegrowthalmosteveryonehasone
stabilityordeclinethereareotherthingstowant

128Gitman/JoehnkFundamentalsofInvesting,NinthEdition

Therapidexpansionphaseoffersthebiggestpayofftoinvestors.Atthisstage,theindustrysproducts
havegainedacceptance,investorscanforeseetheindustrysfuturemoreclearly,andeconomic
variableshavelittletodowiththeindustrysoverallperformance.Thematuregrowthstageismost
influencedbytheeconomiccycle.
12. Fundamentalanalysisisthestudyofthefinancialaffairsofabusiness.Itisessentialtothevaluation
processtotheextentthatthevalueofastockisinfluencedbytheperformanceofthecompanythat
issuesthestock.Anequivalentstatementisthatthevalueofasecuritydependsnotonlyonreturn,
butalsoonriskbothofwhichareaffectedtoalargeextentbytheoperatingcharacteristicsand
financialconditionofthefirm.Fundamentalanalysishelpstocaptureinsightstothesedimensions
fromfinancialstatementsandotherinformationaboutacompanyandincorporatestheminthe
valuationprocess.
13. Historicalanalysisprovidessomeinsight,alongwitheconomicandindustryfigures,forformulating
expectationsaboutthefuturegrowthprospectsandprofitabilityofacompany.Inparticular,historical
analysishelpstheinvestortolearnthestrengthsandweaknessesofacompany,identifyunderlying
trendsanddevelopments,andevaluatethecompanysoperatingefficiency.
14. Ratioanalysisisthestudyofrelationshipsthatexistamongandbetweenvariousfinancialstatement
accounts.Ratioanalysisprovidesadifferentperspectiveontheoperatingresultsandfinancial
conditionofthefirmbyexpandingtheinformationcontentofthefinancialstatements.Themost
significantcontributionofratioanalysisisthatitenablestheinvestortothoroughlyassessthefirms
pastandpresentfinancialconditionandoperatingresults.
15. Whenhistoricalstandardsareused,thecompanysratiosarecomparedandstudiedfromoneperiod
tothenext.Industrystandardsinvolveacomparisonofacompanysratiostothatofothercompanies
inthesamelineofbusiness.Inthefirstcase,theinvestorislookingfordevelopingtrends;inthe
secondcase,theinvestorwantstoseehowthecompanystacksuptoitscompetitors.

Suggested Answers to Investing in Action Questions

The Ten Commandments of Financial Statement Analysis (p. 304)
(a) WhichoftheTenCommandmentsismostimportant?
(b) Whyisitimportanttocarefullyreadthefootnotes?
Answers:
(a) Theanswerwillvarybystudent.PerhapsthekeyistonotethatallofeachCommandmentis
important.ParaphrasingthefirstCommandment,Thoushaltnotuseanycommandmentinisolation.
InstructorsmaydiscussPoint7(onthelimitationsoffinancialstatements)andPoint3(onthe
importanceoffootnotes)ingreaterdetailduringclassdiscussions.
(b) Itisveryimportanttoreadthefootnotescarefullywhileanalyzingfinancialstatements.Anychangein
accountingrules(e.g.changeininventoryvaluationfromFIFOtoLIFOetc.)willbedisclosedhere,
whichmighthaveimportantimplicationsonfinancialperformance.Anyoffbalancesheetitems(like
leases)orcontingentliabilitieswillalsobedisclosedindetailhere.Thesedisclosureswillhave
importantimplicationsforinvestors.Hence,asubstantialamountoftimemustbespentonanalyzing
thefootnotes.

Chapter7AnalyzingCommonStocks129

Suggested Answers to Ethics in Investing Questions

Cooking the Books: What Were They Thinking? (p. 318)
Willtherequirementthatexternalauditorsnotbepermittedtoprovideinternalauditseliminatetheconflict
ofinterest?
Answer:
Inthewakeofcurrentaccountingscandals,separationofinternalandexternalauditsandauditor
independencehasbeenthefocusoftheSarbanesOxleyActof2002andsubsequentrulingoftheSEC.
Theroleofinternalauditistoperformtheassessmentofinternalcontrolstoandreviewoffinancial
documentationonbehalfoftheboardandexecutivemanagementtosafeguardagainstfraudandto
strengthencorporategovernance.Theinternalauditormayalsoprovideadvisoryservicesinoperational
matters,andperformspecialassignmentsifsodirected.
Theexternalaudit,ontheotherhand,shouldgiveanindependentreviewthatthenumbersintheaccounts,
asreportedtotheshareholders,areareasonablepictureofhowthecompanyisdoingandhowitisserving
theinterestsoftheshareholders.Byseparatingbothauditsandmakingthemindependentithasbecome
easierforbothauditorstodetectinstancesofaccountingirregularities.ThepassageoftheSarbanesOxley
Actof2002hasexpandedtheroleofexternalaudittoattestoftheeffectivenessofmanagementcontrol
overfinancialreportingratherthanrubberstampingthenumbersprovidedbythemanagement

Suggested Answers to Discussion Questions

1.

(a) Fiscalpolicywouldusuallyremainfairlystrictduringastrongeconomywithautomatic
stabilizerssuchastaxratesrestraininginflation.
(b) InterestratesinfluencedbytheFedwouldtendtomovehigherifinflationthreatened.
(c) Industrialproductionwouldgrowatmorethan3to5%annually.
(d) Retailsaleswouldtendtoholdorincrease.
(e) Productpriceswouldtendtorisegivenpressuretoproducemoreandwiththebeginningsofthe
wagepricespiral.

2.

(a)
(b)
(c)
(d)
(e)

Airlinestock:productiongrowth,fuelprices,andemployment
ACyclicalstock:currentbusinesscycle,futurepredictionsofeconomicactivity
Anelectricalutilitystock:interestrates,monetarypolicy
Abuildingmaterialsstock:nationalproductiongrowth,realestatesales,interestrates
Anaerospacefirm:governmentspendingandcontractsize,employment

3.

(a)
(b)
(c)
(d)
(e)

Profitability:d,e
Activity:a,f
Liquidity:c
Leverage:b,h
Commonstock:g,i,j

130Gitman/JoehnkFundamentalsofInvesting,NinthEdition

Solutions to Problems
1.

Fromabbreviatedfinancialstatements(dollarsinmillions)
Liquidity
(1)

Networkingcapital

(2)

Currentratio

CurrentassetsCurrentliabilities
$150$100$50
Currentassets/Currentliabilities
$150/$1001.50

Activity
(3)

Totalassetturnover

Sales/Totalassets
$500/$3501.43

Leverage
(4)
(5)

Longtermdebt/Stockholdersequity
$50/$2000.25
Timesinterestearned Earningsbeforeinterestandtaxes/interest
$65/$106.50
Debtequityratio

Profitability
(6)
(7)
(8)

Netprofitsaftertaxes/Sales
$35/$5007.0%
Returnontotalassets Netprofitsaftertaxes/Totalassets
$35/$35010.0%
Returnonequity
Netprofitsaftertaxes/Stockholdersequity
Netprofitmargin

Chapter7AnalyzingCommonStocks131

$35/$20017.5%
CommonStockRatios
(NetprofitsaftertaxesPreferreddividends)/
Numberofsharesofcommonstockoutstanding
$350/10$3.50pershare
(10) Price/Earningsratio Shareprice/EPS
$75/$3.5021.43times
(11) PricetoSalesratio Shareprice/Salespershare
$75/($500/10)1.50
(12) Dividendspershare Totalcommondividendspaid/
CommonSharesoutstanding
$10/10$1.00pershare
(13) Dividendyield
Dividendspershare/Shareprice
$1.00/$751.33%
(14) Payoutratio
Dividendspershare/EPS
$1.00/$3.5029%
(15) Bookvaluepershare Commonequity/Commonsharesoutstanding
$200/10$20
(16) Pricetobookvalue Shareprice/Bookvaluepershare
$75/$20$3.75
BookValue
AssetsLiabilitiesPreferredStock
(9)

2.

Earningspershare

132Gitman/JoehnkFundamentalsofInvesting,NinthEdition

$550,000,000400,000,0000$150,000,000
BookValuepersharesBookValue/NumberofShares
$150M/300M$0.50pershare
3.

PricetoBookValue$5.50/$0.5011

4.

(a) EPS

Netprofitsaftertaxes Preferreddividends
Numberofcommonsharesoutstanding

ForAmherst:
$10,000,000 $0
$4pershare
2,500,000
(Note:Onlypreferreddividends,zerohere,aresubtractedfromnetprofitsaftertaxes.Common
dividendsarepartofEPS.)
Stockholers'equity
(b) Bookvaluepershare
numberofcommonsharesoutstanding
ForAmherst:
$45, 000,000
$18.00pershare
BookValuepershare
2,500, 000
EPS

Pricetobookvalue

Marketpriceofcommonstock
bookvaluepershare

ForAmherst:
$20.00
1.11
$18.00
Marketpriceofstock
(c) Price/earnings(P/E)ratio
EPS
ForAmherst:
$20
P/E

=5times
$4
netprofitaftertaxes
(d) Netprofitmargin
totalrevenues
ForAmherst:
$10,000,000
6.7%
Netprofitmargin
$150,000,000
PricetoBookvalue

Chapter7AnalyzingCommonStocks133

(e) Dividendpayoutratio

Dividendspershare
EPS

ForAmherst:
$1
25%
$4
dividenspershare

marketpriceofcommonstock

Dividendpayoutratio
Dividendyield
ForAmherst:
Dividendyield
(f) PEGRatio
5.

$1.00
5%
$20.00
StocksP/ERatio
5 / 7.5 0.667

35 yearsgrowthrateinearnings

P/E15andP$25
$25/E15$25/15E$1.67

6.

PEGP/E(EarningsGrowthRate100)
EarningsGrowthRate:EndingEarningsBeginningEarningsgivesyouthefuturevaluefactorfor
fiveyears;ScanningacrossthefifthrowoftheFVIFtablegivesyoucanidentifythecolumn(return)
thatresultsinthatcalculatedamount.
$3.22/$2.001.61;FVIF10%,5periods1.611
PEG15/101.5

7.

Annualsales
Totalassets

Totalassetturnover

$28,000,000
1.87times
$15,000,000

Netprofitmargin

Netprofitsaftertaxes
Annualsales

$2,000,000
7.14%
$28,000,000

(b) Returnonassets(ROA)

Netprofitsaftertaxes
Totalassets

(a) Totalassetturnover
ForHighgateComputer:

ForHighgateComputer:
Netprofitmargin

ForHighgateComputer:
ROA

$2,000,000
13.33%
$15,000,000

134Gitman/JoehnkFundamentalsofInvesting,NinthEdition

Note:TheinstructormightwanttoshowthatROAcanalsobefoundbymultiplyingthefirms
totalassetturnoverbyitsnetprofitmargin.ThisapproachcanbeusedtodemonstratethatROA
isafunctionofacompanysprofitabilityanditsassetproductivity.InthecaseofHighgate
Computer,wehave:
ROA
TotalassetturnoverNetprofitmargin
1.870.071413.3%
Netprofitsaftertaxes
ReturnonEquity(ROE)
Stockholder'sequity
ForHighgateComputer:
ROE

$2, 000, 000

33.33%
$6, 000, 000

Bookvaluepershare

Stockholders'equity
#ofsharesofcommonstockoutsatnding

$6,000,000
$12pershare
500,000

ForHighgateComputer:
Bookvaluepershare
8.

TIE2003$550/$2002.75
TIE2004$600/$2502.40
Interestcoveragefell.Thecompanyislessabletomeetitsinterestpaymentsin2004.

9.

(a) (i)

EPS

Netprofitsaftertaxes Preferreddividends
Numberofcommonsharesoutstanding

ForFinancialLearningSystems:
EPS

$6,850,000 $500,000
$2.54
2,500,000

Marketpriceofstock
EPS
ForFinancialLearningSystems:

(ii) Price/Earning(P/E)ratio

P/E
(iii) Bookvaluepershare

$45.00
17.72
$2.54

Stockholders'equity
numberofcommonsharesoutstanding

ForFinancialLearningSystems:
$78, 000,000 $32, 000, 000 $5m
Bookvaluepershare
2,500,000
$16.40pershare

Chapter7AnalyzingCommonStocks135

(b) IftheEPSrisesto$3.75:
17.72

marketpriceofstock
$3.75

Marketpriceofstock$66.45
IftheEPSdropsto$1.50:
marketpriceofstock
$1.50
Marketpriceofstock $26.58
17.72

(c) IftheEPSrisesto$3.75andP/Ejumpsto25:
marketpriceofstock
$3.75
Marketpriceofstock $93.75
25

(d) BoththeEPSandP/Edropto$1.50and10timesearnings:
marketpriceofstock
$1.50
Marketpriceofstock $15.00
10

(e) AsshowninthecaseofFinancialLearningSystems,higherearningsimprovethestockpricefor
agivenP/Emultiple,andwhentheP/Emultiplerises,foragivenlevelofearnings,thestock
pricerises.
10. Wewillusethefollowingthreeratios:
Returnonassets
Netprofitaftertaxes/Totalassets
Netprofitmargin Netprofitaftertaxes/Sales
TotalassetturnoverSales/Totalassets
(a) Inthisproblem,wecannotcalculateROAuntilwefindoutwhatprofitsare.Todothis,wemust
determinesalesandthenapplythenetprofitmargintothissalesfiguretodeterminenetprofits.
Thatis,usingthetotalassetturnoverratio,salesmustbe$20,000,000:
2.0Sales/$10million
Solvingforsales:
Sales$10million2.0$20million
Usingtheequationfornetprofitmargin,netprofitsaftertaxesmustbe$3,000,000:
0.15netprofitsaftertaxes/$20million
Solvingfornetprofits:Netprofits$20million0.15$3million
Giventhisinformation,wecancomputeROAas:
$3,000,000/$10,000,00030%
(Note:Orthisproblemcanalsobesolvedbysimplymultiplyingthecompanysassetturnoverby
itsprofitmargin;i.e.,2.00.1530%).

136Gitman/JoehnkFundamentalsofInvesting,NinthEdition

(b) Tosolvethispartoftheproblem,firstfindthefirmsequity.Weknowithas$10millionin
assetsandtheproblemstatesthat40%oftheassetsarefinancedwithequity.Therefore:
Equity$10,000,0000.40$4,000,000
Now,tofindROE:
ROE

NetProfits $3,000,000

75%
Equity
$4,000,000

(Note:ComparingROEtoROA,weseethatROEismuchlarger[75%vs.30%].Thereasonis
thefirmshighdebt/financialleveragei.e.,60%ofthefirmsassetsarefinancedwithdebt,
whichactstomagnifyprofitability.)
Marketpriceofthestock
11. Price/Earnings(P/E)ratio
EPS
First,findEPS:
EPS

Netprofitaftertaxes
Numberofsharesofstockoutstanding

Since:NetprofitaftertaxesSalesnetprofitmargin:
$150,000,000 0.10 $15, 000, 000

$3pershare
5, 000,000
5,000, 000
$25
P/Eratio
8.3times
$3
Marketpriceofstock
Pricetosalesratio
Salespershare
EPS

Findsalespershare:
Sales
$150, 000, 000

Numberofsharesoutstanding
5, 000, 000
$30pershare

SPS

Now,thePriceSalesRatiois:
$25
PSR
0.833
$30
Dividendspershare
EPS Dividendpayoutratio*
DividendYield

Marketpriceofcommon
Marketpriceofcommon
$3 0.35 $1.05

4.2%
$25
$25
*Note:DividendspershareEPSDividendpayoutratio.
Stock'sP/ERatio
PEGRatio

35yearsgrowthrateinearnings
Thisimplies:Growth
Growth

StocksP/ERatio
PEGRatio
8.3/24.15%

Chapter7AnalyzingCommonStocks137

138Gitman/JoehnkFundamentalsofInvesting,NinthEdition

12. ROANetProfitMarginTotalAssetTurnover0.0820.16or16%.
13. ROEROAEquityMultiplier
ROANetProfitMarginTotalAssetTurnover
EquityMultiplierTotalAssets/TotalEquity
ROA0.0820.16
EquityMultiplier$1B/$500M2
ROE0.1620.32or32%
14. Sales:TotalAssetTurnoverXAssets
TotalAssetTurnover2andTotalAssets$1B
Sales2$1B$2B
NetProfitNetProfitMarginSales
NetProfit0.08$2B$160M
15. Thereisnosetsolutiontothisproblem,sincetheanswerwillvarywiththestockselectedbythe
student.Thestudentsshouldbeencouraged(orrequired)toactuallycomputetherequestedratios
fromtherecentfinancialstatementsofthecompaniestheyselect.Theycanuseannualreports,
Mergent,orS&Ptoobtainneededbalancesheetandincomestatementinformation.TheInternetalso
hasseveralusefulsites.
Thisproblemmayresultinsomeinterestingandpossiblyconfusingresponses,becausestudentswillget
theirinformationfrommanydiversesources.Frequentlytheratiocalculationswilldiffer.Thispresents
theinstructorwiththeopportunitytodiscussrefinementstoratiocalculations,theimportanceof
consistency,andthefactthattheratiosareonlytoolstobeusedinthestockevaluationandselection
process.
16. Thereisnosetsolutiontothisproblem.Indevelopingananswer,thestudentscaneitherpickup
theratios/informationfromValueLineorasimilarsource,ortheycanberequiredtoactually
computerequestedratiosfromtherecentfinancialstatementsofthecompaniestheyselect.Annual
reports,MergentorS&Pwillprovidetheneededbalancesheetandincomestatementinformation.
ThefollowinginformationwastakenfromPart1oftheValueLineInvestmentSurvey.

Chapter7AnalyzingCommonStocks139

Value
Lines
Timeliness
Ranking
3
2

Beta
1.05
1.20

SaraLee
CampbellSoup

5
3

0.55
0.65

13.5
17.2

3.7
2.4

0.29
0.18

IBM
Intel

3
2

1.05
1.35

20.6
41.6

0.7
0.2

1.02
0.25

Tupperware
Ball

4
2

0.75
0.95

20.0
14

5.9
1.1

0
1.34

LizClaiborne
Quicksilver

3
3

0.95
1.00

13.8
16.3

0.6
0

0.89
0.21

GeneralDynamics
Boeing

3
4

0.75
1.00

16.5
38.7

0.6
0.32

WalMart
Target

Dividend Earnings
P/ERatio
Yield
PerShare
27.3
0.7
0.46
19.5
0.7
0.33

1.7

140Gitman/JoehnkFundamentalsofInvesting,NinthEdition

17. (a) AllofthefollowingratiosforOtagoBayMarinearebasedonthe2003and2004financial

statements($inthousands)andarecomputedusingtheformulasinthechapter:
(1) Currentratio
2003
2004
Industry

Currentassets/Currentliabilities
$133,212/$22,498
5.92
$111,914/$50,862
2.20
2.36

(2) Totalasset
turnover
2003
2004
Industry

Sales/Totalassets

(3) Debtequityratio
2003
2004
Industry

Longtermdebt/Stockholdersequity
$20,268/$181,704
11.15%
$40,735/$212,343
19.18%
10.0%

(4) Netprofitmargin
2003
2004
Industry

Netprofitaftertaxes/TotalRevenues
$32,032/$245,424
13.05%
$35,442/$259,593
13.65%
9.30%

(5) ROA
2003
2004
Industry

Netprofitaftertaxes/Totalassets
$32,032/$224,470
14.27%
$35.442/$303,940
11.66%
15.87%

(6) ROE
2003
2004
Industry

Netprofitaftertaxes/StockholdersEquity
$32,032/$181,704
17.63%
$35,442/$212,343
16.69%
19.21%

(7) EPS

$245,424/$224,470
$259,593/$303,940

2003
2004

Netprofitaftertaxes Preferreddividends
Numberofcommonsharesoutstanding
$32,032 $0
10,848

$2.95pershare

$35,442 $0
10,848

$3.27pershare
$1.59

Industry
(8) P/ERatio
2003
2004
Industry

1.09
0.85
1.27

sharedprice/EPS
$80.75/$2.95
$74.25/$3.27

27.37
22.71
19.87

Chapter7AnalyzingCommonStocks141

(9) Dividendyield
2003
2004
Industry

Dividendspershare/Marketpriceper
share
$0.27/$80.75
0.33%
$0.35/$74.25
0.47%
0.44%

(10) Dividendpayoutratio
2003
2004
Industry

Dividendspershare/EPS
$0.27/$2.95
9.15%
$0.35/$3.27
10.70%
26.00%

(11) Pricetobookvalue
ratio

Shareprice/Bookvaluepershare

Bookvaluepershare

stockholder'sequity
numberofcommonsharesoutstanding

2003BV

$181,704
$16.75
10,848

2004BV

Pricetobookvalue:
2003
2004
Industry

$80.75/$16.75
$74.25/$19.57

$212,343
$19.57
10,848
4.82
3.79
6.65

(b) Basedonthecomparisontoindustryaverageratios,thefinancialconditionofOtagoBayMarine
(OBM)appearstobedeteriorating.First,OBMscurrentratiohasdeclined63%,indicatingits
abilitytomeetshorttermobligationshasweakenedsubstantially.OBMscurrentliabilities,
whichhavegrown126%overthepastyear,aredrivingthisweakenedpositioninliquidity.
Also,theactivitymeasuretotalassetturnoverwhichwasbelowtheindustryaveragelast
year,hasdeclinedevenfurther,suggestingthatcorporateresourcesarebeingpoorlymanaged.
Withrespecttoleverage,OBMsratiohasgrowntonearlytwicetheindustryaverage,indicating
aneedtocontrolandreducetheamountofdebtinthecapitalstructure.Despitethehighleverage
ratio,thefirmsROE,whichindicatestheextenttowhichleveragehasenhancedthereturnsto
stockholders,hasdeclinedevenfurtherbelowtheindustrysaverage.Similarly,OBMsROAhas
declinedevenfurtherbelowtheindustrysaverageROA.ThedeclineinROAisrelatedtothe
largeincrease(115%)inPPE,andthe107%increaseinotherlongtermassets.Acomplete
analysiswouldnecessarilyincludeananalysisoftheseassets.Forexample,theincreaseinPPE
couldindicatethatthecompanyisanticipatingfuturegrowth,orthatthecompanyhasupdatedits
PPEandwillbemuchmoreprofitableinthefutureduetotheefficienciesofmodernequipment.
ThemarketappearstoreflectthisdeteriorationinOBMsfinancialpicturefrom2003to2004.
Thestockpricehasdeclined8%andtheP/Eratiohasdeclined17%,andthepricetobookvalue
hasdeclineanother1%toabouthalfoftheindustryaverage.
Insummary,despitetherelativelysmallpercentageincreasesinnetprofitaftertaxes,OtagoBay
Marineseemspoorlymanaged.Goneunchecked,OBMsfinancialconditionwilldeteriorate
furtherandbereflectedinprofitabilitymeasureswellbelowindustryaverages.AlthoughOBMs
ratiosareonlyonepartoftheirtotalfinancialoutlook,theyseemtoindicatethatproblemsexist
withinthefirm.

142Gitman/JoehnkFundamentalsofInvesting,NinthEdition

18. (a)

FOR2000
netearnings

Profitmargin
netsales

$20.2
$179.3
11.27%
netsales
Assetturnover

totalassets
$179.3

$136.3
1.32
UsingprofitmarginandassetturnovertocalculateROA:

netearnings netsales

netsales
totalassets
ROA 11.27% 1.32
14.88%
ROE ROA Equitymultiplier
ROA

WhereEquitymultiplierTotalassets/stockholdersequity
$136.3/$109.6
1.24
ROE
14.88%1.24
18.45%
(b) For2004:
ROA
ProfitmarginTotalassetturnover
13.65%
0.85
11.60%
ROE
ROA
Equitymultiplier
11.60%
($303,940/$212,343)
11.60%
.43
16.59%
(c) Between2000and2004,OtagoBayMarinesROAandROEmeasuresbothdeteriorated.With
respecttoROA,totalassetshavegrownfasterthannetsales,therebyaffectingtotalasset
turnoverandconsequently,ROAadversely:Whereasnetsalesgrew44%,totalassetsgrew
123%.ThesecondcomponentofROA,theprofitmargin,grewslightly.Thus,thedeclinein
ROAisattributablemainlytothedramaticincreaseintotalassets(ROAfellfrom14.88%in
2000to11.6%in2004).
ThegrowthintotalassetsisalsoamaincontributortothedeclineinROE,whichiscomposedof
ROA,multipliedbytheequitymultiplier.Thehigherequitymultiplierreflectsthefactthattotal
assetsalsooutgrewstockholdersequity(alargeportionofnewassetsweredebtfinanced).
However,themultiplierwasnotlargeenoughtoreversetheeffectsofthedeclineinROAon
ROE.Thus,throughthesharpincreaseintotalassets,ROAandROEdeclined.

Chapter7AnalyzingCommonStocks143

(d) Generally,thesechangesfrom2000to2004donotappearfundamentallyhealthyforOtagoBay
Marine.Thehighertotalassets,alargepercentageofwhichwasfinancedbydebt,appearsto
havereducedOBMsprofitabilityanditsfutureabilitytomeetshortandlongtermobligations.
ThedeclineinROAisrelatedtothelargeincrease(115%)inPPE,andthe107%increasein
otherlongtermassets.Acompleteanalysiswouldnecessarilyincludeananalysisofthese
assets.Forexample,theincreaseinPPEcouldindicatethatthecompanyisanticipatingfuture
growth,orthatthecompanyhasupdateditsPPEandwillbemuchmoreprofitableinthefuture
duetotheefficienciesofmodernequipment.

Solutions to Case Problems

Case 7.1Some Financial Ratios are Real Eye-Openers
Theobjectiveofthiscaseistohavestudentscalculateandinterpretratiosaspartofthefundamental
analysisofafirm.
1.

AlltheratiosbelowforSouthPlainsChemicalarecomputedaccordingtotheformulasinthechapter.
SouthPlainsChemical(dollarsinthousands)
Liquidity
(a) Networkingcapital

(b) Currentratio

Activity

CurrentassetsCurrentliabilities
$21,250$10,000$11,250
Currentassets/Currentliabilities
$21,250/$10,0002.12

(c) Receivablesturnover Sales/Accountsreceivable

$50,000/$8,0006.25
(d) Inventoryturnover Sales/Inventory
$50,000/$12,0004.17
(e) Totalassetturnover Sales/Totalassets
$50,000/$30,0001.67
Leverage
Longtermdebt/Stockholdersequity
$8,000/$12,0000.67
(g) Timesinterestearned Earningsbeforeinterestandtaxes/interest
$10,000/$2,5004.0
(f) Debtequityratio

Profitability
Netprofitsaftertaxes/Sales
$5,000/$50,0001or10%
(i) Returnontotalassets Netprofitsaftertaxes/Totalassets
$5,000/$30,0000.166or16.67%
(j) Returnonequity
Netprofitsaftertaxes/Stockholderequity
$5,000/$12,0000.4167or41.67%
(h) Netprofitmargin

144Gitman/JoehnkFundamentalsofInvesting,NinthEdition

CommonStockRatios
(k) Earningspershare

(l) Price/Earningsratio
(m) Dividendspershare

(n) Dividendyield
(o) Payoutratio
(p) Bookvaluepershare
(q) Pricetobookvalue

(NetprofitsaftertaxesPreferreddividends)
/#ofsharesofcommonstockoutstanding
$5,0000/5,000$1/share
Shareprice/EPS
$25/$125times
Totalcommondividendspaid/
Commonsharesoutstanding
$1,250/5,000$0.25/sh.
Dividendspershare/Shareprice
$0.25/$25.000.01or1%
Dividendspershare/EPS
$0.25/$1.000.25or25%
Commonequity/Commonsharesoutstanding
$12million/5million$2.40
Shareprice/Bookvaluepershare
$25/$2.4010.42

2.

Comparingtheratioscomputedinquestion1tothelatestindustryaverages,wefind:
(a) Liquidity:SouthPlainsismoreliquidthantheaveragefirminitsindustry.
(b) Activity:HereSouthPlainsisweak;thelowratiossuggestpoorutilizationofassets.Since
accountsreceivableandinventoryareclosetotheindustryfigures,thedeviationseemstocome
fromexcessfixedassets.
(c) Leverage:Thefirmusesmoredebtthanaverage,anditsabilitytocoverinterestismuchlower
thantheaveragefirm.
(d) Profitability:Theresultsaremixedhere.ThefirmhashighermarginsandhigherROE.The
lowerreturnonassetsreflectthepooractivityratiosmentionedabove.(Thefactthatthefirmcan
havelowROAandhighROEisduetoitshighleverage.SinceasmallerpercentageofSouth
Plainsisfinancedwithequity,theROEismagnifiedmorethanforthetypicalfirm.)
(e) Commonstock:Allthemeasuresrelativetodividendsarelowforthisfirm,yetitsprice/earnings
ratioishigherthanaverage.Thissuggeststhatthemarketanticipatesaboveaverageprofitability
andreturnsinthefuture.Thatiswhy,althoughitscurrentdividendyieldislow,investorsare
willingtopayahighprice/earningsratio.Thesamegoesforpricetobookvalue;liketheP/E
ratio,itsmuchhigherthanaverageandprovidesfurthersupportthatthemarketisanticipating
goodthingsfromSouthPlains.

3.

Thefirmseemstohavegoodprospectsforattractivereturnsbutalsohashighrisk.ForJackto
continuehisevaluationofSouthPlainsChemical,hemustfeeltheopportunitiesforthefirmare
promisingandcommensuratewiththeriskinvolved.DuetoSouthPlainsstrongprofitability,he
shouldnowproceedwithamoreindepthanalysis.(Althoughnotdiscussedinthecase,fundamental
analysisshouldnotbeperformedalone;carefuleconomicandindustryanalysesarealsoimportant.)

Chapter7AnalyzingCommonStocks145

Case 7.2Doris Looks at an Auto Issue

Thiscaseallowsthestudenttoexperiencethethreestepsofsecurityanalysis.
(a) OthereconomicinformationthatDorismightfindhelpfulincludesgovernmentfiscalpolicy(taxes,
spending,debtmanagement);monetarypolicy(moneysupplygrowth,interestrates);consumer
spendingandtheinvestmentplansofbusinesses;energysituation(oilimports,costandavailabilityof
supplies,domesticoilprospects);foreigntradeandthebalanceofpayments(especiallythevalueof
thedollar);andtheinflationrate.Althougheachisimportant,thethreemostimportantareprobably
interestrates,foreigntradeandthecostofoil.Interestratesareimportantsincemostautomobilesare
purchasedoncredit.Foreigntradeisimportantbecauseoftheimpactthatautoimportsandexports
haveonautosales;alsoforeigntradeaffectsthevalueofthedollar,whichinturnmakesU.S.cars
moreorlessexpensiverelativetoimports.Finally,thecostofgasandoiliscloselywatchedby
drivers,andcanimpactthedemandforgasguzzlersversusmorefuelefficientcars.
(b) 1. Autoimports:Trendsinautoimportsmoreclearlydefinepotentialgrowthfordomestic
producers.TherecentgrowthofimportshasbeenattheexpenseofU.S.producers.Federal
restrictionsonforeignimportswouldgreatlyalterindustryconditionsfordomesticfirms.
2. TherelationshipoftheUnitedAutoWorkers(UAW)andtheautomakersisanimportantpartof
theanalysis.Abetterrelationshipleadstolowercostsofproduction;apoorrelationshipmay
meanstrikes,slowdowns,higherwagecontracts,andsoon.Oneimportantdatehereisthe
expirationdateoftheexistingcontract.
3. InterestRates:Asmentionedabove,automobilesareusuallypurchasedwithborrowedfunds.
Thecostandavailabilityofthesefundsisquiteimportantinthesaleofnewcars.
4. Thecostofgas:Sincemostcarsneedgasolinetorun,itisveryimportanttoassessthecourseof
gasolinepricesinthefuture.Ifgasolinepricesbecomeextremelyhigh,theautoindustryisbound
tosuffer.(Notetotheinstructor:Thesituationcanbemorecomplex.Forexample,ifthegas
priceisveryhigh,consumerswilltendtogetridoftheiroldgasguzzlersandbuysmalleconomy
cars.Thus,theissuecanalsorevolvearoundwhetherornotthecompanyweareconsideringis
planningtoproducesmallcars.Ifthisisso,thenincreasinggasolinepricescanboostthesalesof
cars,atleastintheshortrun.)
(c) 1. Salescanbefoundfromthetotalassetturnoverratio:
Commonsharesoutstanding

Sales
Totalassets

Fromthecase:
1.5

Sales
$25billion

Solvingforsales,wehave:
Sales1.5$25billion$37.5billion.

146Gitman/JoehnkFundamentalsofInvesting,NinthEdition

2. Profitscanbefoundfromthenetprofitmargin:
Netprofitmargin

Netprofitsaftertaxes
Sales

Fromthecase:
0.15Netprofitaftertaxes
$37.5billion
Solvingfornetprofits,wehave:
Netprofitsaftertaxes0.15$37.5billion$5.625billion
3. Wecanfindcurrentassetsusingthefigureforcurrentliabilitiesandthenetworkingcapital
formula:
NetworkingcapitalCurrentassetsCurrentliabilities.
Fromthecase:
$3.4billionCurrentassets$5billion
Solvingforcurrentassets,wehave:
Currentassets$3.4billion$5billion$8.4billion
Therefore,thecurrentratioequals:
Currentassets
$8.4billion

1.68
Currentliabilities $5billion
4. ThepriceofthestockcanbefoundfromtheP/Eratio:
Price/Earningsratio

Pricepershare
EPS

Fromthecase:
12.5

Pricepershare
$3

Solvingforshareprice,wehave:
Pricepershare12.5$3$37.50

Chapter7AnalyzingCommonStocks147

5. Tofindthedividendyield,wefirsthavetofinddividends,usingthedividendpayoutratio:
Dividendpayoutratio

Dividendspershare
EPS

Fromthecase:
0.4

Dividendspershare
$3

Solvingfordividends,wehave:
Dividendspershare$30.4$1.20
Therefore,dividendyieldequals:
Dividendspershare $1.20

3.2%
Pricepershare
$37.50

Outside Project
Chapter 7Going to the Source: The Annual Report
Mostfinancialstatementsandstockvaluationexamplesfoundincollegetextbookstendtobecouchedin
fairlysimpleterms.Thequestionthatstudentsoftenaskis:Howclosetorealityareweworking?This
projectwillgetyouasclosetorealityaspossiblebyhavingyoulookattheactualnumbersofareal
corporation.
Getanannualreportofanycorporation.Itdoesnothavetobethemostrecentone,butitshouldbealarge
companyinanonregulated,nonfinancialindustry.Avoidutilitiesandfinancialinstitutions,likebanks,as
theaccountingforthesecompaniesisverydifferentandcouldbeconfusing.Companieswillusuallysend
annualreportsifyousimplyaskthem,orlibrariesoftenhaveannualreportfiles.Onceyouhaveanannual
report,findtheincomestatementsandbalancesheets,andcalculatealltheratiosyoupossiblycan.Usethe
liquidity,activity,leverage,profitability,andcommonstockformulaspresentedinthetext.Youwillhave
tolookinthefinancialnewsforcurrentpriceanddividendinformation.Notethatthereislittlevaluein
knowingaratioforoneyear.Youneedtolookatseveralyears,andtheannualreportwillhaveafiveor
tenyearsummaryofthemostimportantinformation.Afteryouveruntheratios(youshouldhavethe
financialdatatoruntheratiosforatleasttwoyears),takeafewminutesandanalyzeyourresults:Whatdo
thenumberstellyouthatyoulike?Thatyoudontlike?
Whendoingthisproject,taketimetothinkthroughandreadthereport;theannualreportisnotjust
numbers.Thediscussionofthecompanybyitschairmanusuallyprovidesinformationabouttherecent
pastandtheprospectsforthefuture;inaddition,theresconsiderableinformationinthesereportsabout
productlines,corporatedevelopments,andthelike.Thisreportisdesignedtobringstockholders
uptodateoncompanyoperations.Shareyourcommentsandnotesaboutthereportwiththeclass.