Welcome back one more time. In this lesson, we're going to look at financial analysis once again. And we will continue with our Home Depot example. For this presentation, we're going to use an investment website just to illustrate how easy financial analysis can be when we let others do the number crunching. I've chosen Yahoo, but there are literally hundreds of choices out there. Let's go over to the finance section of Yahoo.
To look up Home Depot, we simply need to type in its ticker symbol HD. This will bring us too Hey, stock quote screen. So let's begin our analysis from here. Now in this video, we are focused on financial analysis but for the sake of interest, I'm going to sprinkle in a few other tidbits on investment analysis. Investment websites offer a plethora of information. Let's go this top of the screen work our way around and down.
The screen to see what there is here. Now we are on the quote screen of the Yahoo site. And you can see that the current trading price of the home depot shares is 48 and a half dollars and we also have some information around the previous close the opening price, the bid and the ask, the bid is the amount someone is willing to pay at that moment for the Home Depot shares. The ask is the lowest amount that a Home Depot shareholder is willing to sell his shares for at that moment. The price target is determined by pulling the analysts community and averaging their best guesses beta is a complex measure, but basically you should look at it as an indicator of volatility. A beta of one means that the company is about as volatile as the overall market.
A Beta greater than one implies that the stock is more volatile. So small cap stocks will often have betas that are two or three times more volatile than the overall market. The range and the volume are simply trading statistics. The market cap is the current stock price multiplied by the number of shares outstanding. Note that this represents the market value of Home Depot shareholders equity. When we were looking at the balance sheet earlier, we were looking at the book value of equity.
The two are not the same thing. The market value can be higher or lower than the book value depending on the investor sentiment, earnings per share. TTM is the earnings per share for the trailing 12 months. The P e TTM stands for the price to earnings ratio. This is another common ratio used to compare the valuations of different companies. The price is the The current trading price which in this case is $48 and 57 cents, and the E stands for the earnings per share based on a trailing 12 month basis.
Obviously, you have to have positive earnings before you can have a P e ratio, so it works best for established companies. The higher this ratio, the more expensive the stock is, I say expensive loosely because it's also a factor of the potential growth in future earnings. A reasonable starting point for evaluating a P e ratio is say 10. That is to say that a stock is trading at 10 times its current earnings. If you take the inverse of this P e ratio, you get the earnings yield. So one divided by 10 would be in this case 10%.
As you may recall in an earlier lesson, where I said that a regulated utility is expected and actually allowed to earn 10% return on equity that kind of justifies how I started with my P e ratio of 10 as the basis of our discussion. Let's look at the Home Depot. In this case its p e ratio is 19.67. Is the stock expensive? Well, assuming limited growth, the answer would probably be Yes, as this would imply an earnings yield of just over 5%, which is clearly inadequate for most equity investors who would be looking for returns as something higher than 10%. However, keep in mind that the Home Depot is cyclical, as we saw in earlier videos, and earnings have been growing strongly in recent years during the housing recovery.
So the expectation is that Home Depot's future earnings will continue to grow and compensate for this higher valuation multiple. That's all I'm going to say on PE ratios. Right now, but it's probably the most common valuation rule of thumb out there. So it's good to understand what it is you're looking at and what it's telling you. Next we have the dividend yield another important indicator for investors. dividend yield is calculated as the dividends per share divided by the stock price.
Most blue chip stocks will yield between one and 4%, which may seem insignificant unto itself, but many companies will slowly grow this dividend over time. Companies really try not to cut dividends, but investors need to always be wary of how safe the dividend really is. The last recession ended many a company's dividend which had the double negative impact of eradicating the income stream to the shareholders and just add insult to injury the stock prices crashed as well. One way to look at the safety of dividends is to calculate the dividend coverage ratio. This is calculated by dividing the total evident per share by the earnings per share. In Home Depot's case this ratio is approximately 40%, which suggests that the dollar 16 dividend is well covered by the current earnings and the dividends should be safe.
A low ratio might trigger the expectation that the company may raise its dividend, a higher ratio may trigger the possibility of a dividend cut. On the right hand side of the screen, we have a stock chart stock charts are included. For more than just curiosity. There is an entire discipline called technical analysis that uses the stock chart to predict the future direction of the stock price. I'll leave this topic for another course. At the bottom of the screen we have the current headlines.
For large cap stock like Home Depot, there'll be no shortage of articles and coverage. Occasionally you'll see a press release from Home Depot itself. These are similar to those that we saw filed earlier on Edgar at the SEC. And finally, On the left hand side of our screen, we see a toolbar that gives us lots more information. The order book gives us a list of the buyers and sellers of the stock. The options includes all the trading activity for the puts and calls on the Home Depot stock, and option is the right but not the obligation to do something, either to buy or sell shares.
A call option is the right to acquire a Home Depot shares at a future date for a specific price called the strike. Put option is the right to sell Home Depot shares at a future date for a specific price. Historical prices are just a list of the closing prices and volumes for each of the recent trading days. In the chart section, we can look at the stock price from any number of perspectives. Again, we'll leave this area alone in this course. news and information includes the headlines, the release dates and the rumor Mills can we get To the company information section, and it's in here that we find some good stuff that gets pulled and summarized for us from the company's 10 K and 10.
Q's. The profile gives us a snapshot of the company and a handy link to the company's website. Key statistics calculates many of the ratios that we've talked about in this course. Let's pause here to look at some of the other ratios we haven't talked about. After all, this is a course in financial analysis. First, I want to draw your attention to enterprise value.
Enterprise value is defined as the market capitalization, ie the equity value plus the value of the funded debt. You'll notice a little further down in this section we have the enterprise value divided by EBIT up aside from the P e ratio, this is perhaps the second most common valuation metric and the one most often used by the investment bankers when they negotiate and structure m&a deals. Here If you ask me what a business is worth, I always start with eight times EBITDA and then adjust upwards or downwards from there. Returning up a few lines, you'll see the P e ratio again, but it also has a forward p e ratio. This ratio is calculated using the average of the analysts estimates of future earnings. So as you can see, with the forward p e ratio drops to 15 times next year's earnings from the 19 times the trailing earnings that we saw earlier, which means that the analysts are expecting the company to continue growing earnings per share into the year ahead.
The peg ratio is also a nice ratio to look at as an answer to the question of whether you're buying growth at a reasonable price. The PE ratio is calculated as the P e ratio divided by the expected growth rates. a ratio of less than one implies an undervalued stock more More than one implies an overvalued stock. Home Depot is just slightly higher than one implying that it's largely fully valued. A price to sales ratio is not all that meaningful in my mind, so we'll skip that indicator. But this metric is used for companies that have yet to achieve profitability, and perhaps don't have a P e ratio.
The price to book ratio is a comparison of the market value of equity versus the book value of equity. at nearly four times the book value is implied that there is a significant amount of internally generated goodwill in Home Depot. And this makes sense given that the company has been organically growing its business for decades. It also generates strong returns on equity and assets. As we saw earlier in our analysis, these two would be indicators of goodwill. Remember, internally generated goodwill never goes on the balance sheet.
So it's not necessarily an indication of an over evaluation, you can see the margin analysis has been calculated and updated for us, the management effectiveness ratios. Likewise, in the income statement section, they have calculated EBITDA and the growth rates for us very convenient. The balance sheet covers much of what we've already discussed. And similarly, for the cash flow statement, the trading information is getting back at the technical analysis. So I'll leave this aside. The share statistics give us a sense as to how many shares are outstanding and how much insider ownership there is.
The dividends and splits are also important pieces of the puzzle that we've already discussed. So as you can see, on this one screen, we have many of the statistics we're looking for. The next section along the left hand navigation gives us a direct link to the SEC filings. After that That we have the competitor section which is interesting as well as you can now see and compare Home Depot and Lowe's directly. Notice how similar the two companies are valued in terms of the P e ratio and their peg ratio. gross margins are also a dead heat.
It has been a coin toss in recent years as to which company is better. The next section along the left hand navigation isn't titled industry, and it has similarly interesting comparisons with other players in the home improvement store industry. It looks like there are 11 participants in this industry which are tracked by Yahoo. Next up we have the components. In this section you'll find out information as to which institutional funds hold Home Depot stock. The next section below that is where the analyst coverage is summarized.
This is where you can get a sense of the future expectations for sales and earnings per share. Then we have the ownership section which summarizes which bigwigs are holding, buying or selling Home Depot stock. And finally, we have the financials. These are taken directly from Edgar filings that we looked at earlier. In this section, you can look at the annual as well as the quarterly data for the company of interest. So there you have it, Are you impressed yet with all the information you can get for free in one location.
The only thing perhaps missing is some of the disclosures we talked about earlier, around liquidity maturities and the key financial covenants for those who still need to go back to the actual filings to get that sort of information. But as we said at the outset, this only works well for public companies, the larger the better. Obviously, when you're dealing with private companies, or small capitalization companies that are well covered, are fully included in the database. Then you'll have to roll up your sleeves and get your hands a little bit 31 cover the stories that exist within the financial information you have been provided, so we will end where we began. Financial statements are not a random set of numbers. They are integrated statements that tell a story about how well management has performed, how the executives and the boards are allocating capital, the areas of strengths and weaknesses and the return to cheap from the business.
Good luck with your financial analysis. See you again in your next learning endeavor. Until then, don't stop to get to the top and get to the top. Don't stop