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Introduction:
- Sections 2 through 5 are covered here.
Information
- Percent pre-tax profit on sales for a year:
- Take the tax rate of a year, ex: 37% income tax and express it as decimals, 0.37.
- subtract the figure from 1.00 which would be (1.00 - 0.37) = 0.63.
- Take the net profit for a year, say 2 billion, divide it by 0.63 which is 3.18 billion.
- Take the sales, say 25 billion. Divide 3.18 by 25 billion which is 0.1272
- convert to percent, that would be 12.72 % for that year.
Percent earned on equity, this is listed as net worth on value line reports.
It is eps/book value.
- If doing a study on the latter half of the fiscal year better to base the estimated
value line numbers, otherwise use the actual figures of last year.
- Estimated high earnings for 5 years in the future:
- Use the trend line.
- Preferred procedure: starts with estimated sales rather than earnings, assumes sales
estimates are more reliable than earnings.
- Take the sales, say $50 billion.
- Take 10% pretax profit margin or whatever for the next 5 yrs, an estimate.
- 10% of $50 billion would give us a $5 billion pretax profit.
- Take a tax rate of 37%, so 0.63 * $5 billion = $3.15 billion is our net profit.
- $3.15 billion divided by the number of shares outstanding gives us the eps
- Compare the numbers from the graph as well as this. Based on the 2 numbers,
choose an approopriate estimate.
- Estimated low price for the next 5 yrs:
- The theory is that a growing company will be increasing its earnings each year and probably
won't sell at a lower p/e than it has in the past.
Section 5 of the SSG shows us the percent annual return, the stock would produce if our
estimates turn out right.
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