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Birds of a Feather / Teens and Their Money


Subject:  Re: Stock of the Week: Activision (ATVI) Date:  2/27/2008  9:40 PM
Author:  TMFGebinr Number:  1996 of 2683

Hi Jognils,

Nice work. Noticed you had a couple of questions which I might be able to help you with.

Sales growth, quarterly:
Yes, differences in sequential sales (that is, from one quarter to the next) is seasonal, so there will be some big swings here. That is why most analysts look at year over year growth which is one quarter compared to the same quarter in the previous year. So the Christmas quarter is always compared with the Christmas quarter. That gets rid of the seasonal effect.

This also allows more accurate looks at gross, operating, and net margins to see how they are (hopefully) improving for the same quarters separated by a year.

If you want to look sequentially, I suggest use rolling TTM numbers, that is Q1+Q2+Q3+Q4, Q2+Q3+Q4+Q1, Q3+Q4+Q1+Q2, and so on, moving forward in time by one quarter at a time. This captures an entire year, so this also gets rid of the seasonality problem.

Return on assets or return on equity:
These are usually reported as full-year figures. So, for the net income part of this equation, use the total net income from the last four quarters. For the assets or the equity, take the average of that item over the course of that year. In other words, take the amount at the beginning of the time period, add the amount at the end, and divide by two.

The reason it's done this way is because the income statement shows what happens over the course of some time period, but the balance sheet (where assets and equity are found) are just snapshots, frozen in time. By taking the average, you convert those snapshots into a number that represents the time period.

Let me give an example using ATVI:
Net income:
Q3, 12/31/07: $272.2 million
Q2, 9/30/07: $0.7 million
Q1, 6/30/07: $27.8 million
Q4, 3/31/07: ($14.4) million
TTM: $286.3 million

Total assets:
End Q3, 12/31/07: $2,613.1 million
End Q3, 12/31/06: $1,891.5 million (this is also the beginning value for Q4)
Average: $2,252.3 million

ROA: $286.3 / $2,252.3 = 11.4%

Similarly with ROE, using equity instead of assets.

Now, some people use EBIT (earnings before interest and taxes) instead of net income. That might explain some differences between websites' data.

As for different numers between CAPS and Yahoo! Finance, anything that is price based (such as P/E, P/Sales, Dividend yield, etc.) on CAPS uses a "recent" price instead of the latest price. Thus, these ratios will differ between the two sites.

Hope this helps.

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