In this video I go over some key aspects of the income statement -- a statement released by companies, usually on a quarterly basis, that provides a breakdown of their income and costs.
There are three key parts of the income statement focused on in this video:
1. Earnings Per Share. This is the company's profits divided by outstanding shares. It constitutes what portion of the company's profits you are buying when you buy a single share (or the company's losses if they are not profitable). Profitable companies are usually the safer bet, but of course the risk/reward principle is important here; companies that have yet to reach profitability typically offer the most potential for share price appreciation. For companies that are not yet profitable, it is important to evaluate their balance sheet to ensure that they have enough cash and low enough expenses to sustain operations until they can finance their growth off profits.
2. Earnings Growth. As income statements are issued on a quarterly basis, you can easily see how income is growing or declining (made even easier by free tools like Google Finance). Historically, companies that have growing earnings have growing share price as well. In the mining sector, growing earnings are determined by (1) the market price of the metal and (2) how much metal the company can mine and at what cost. We'll get more into the costs component of mining in future videos.
3. P/E Ratios. Personally this is one of my favorite metrics that I rely the most on. Take share price, divide it by earnings per share, and we get the P/E ratio. Currently, the average P/E ratio of the companies in the S&P 500 is about 22. If you see stocks below that that look promising, that can be a sign that the share price is low relative to the company's earnings. Conversely, during the first dot com bubble we saw the S&P 500 have an average P/E ratio of over 45. High P/E ratios suggest the company may be overvalued, or conversely, the market has high expectations for future growth. Personally, I like to focus on stocks with P/E ratios below the S&P 500. There are mining stocks that are profitable and issuing dividends with P/E ratios below 15; personally, these are of interest to me as value opportunities that have solid potential for me to buy and hold for a few years.
In the next video, we'll discuss dividend yields as well as techniques for scanning for stocks.
InformedTrades Gold Club: www.informedtrades.com/trades.php?page=goldclub-intro
Trade free for 60 days with TD Ameritrade (limited time offer): bit.ly/y5lsg2