No. of Recommendations: 3

I've VERY new at trying to value a stock, and have spent a lot of time
on initial efforts at getting my calculations correct. Here's an
example of my efforts, done against Microsoft's 2003 Annual 10-K filing.
Please glance at my calculations and correct me if you think I've made
an error! (Don't bother checking the math, it is the formulas I'm
worried about - please pay closest attention to the P/E Growth Ratios
and Fool Ratios).
Hopefully this post will also help future newbies figure out common
mistakes and will facilitate hand-holding and baby-steps toward
understanding financial statements.
I'll begin by posting a quicky version Microsoft's 2003 numbers (in
millions, except per-share amounts):
====================
Balance Sheet
====================
Current Assets 58973
Cash 6438
Short-Term Investments 42610
Receivables 5196
Inventories 640
Property, Plant, and Equipment 2223
Total Assets 79571
Current Liabilities 13974
Payables 1573
Short Term and Long Term Debt 0
Retained Earnings 25676
Shareholder's Equity 61020
====================
Income Statement
====================
Revenues 32187
Cost of Revenues 5686
Operating Income 13217
Interest Expense 0
Provision for Income Taxes 4733
Net Income 9993
Diluted Shares 10882
====================
Cash Flow Statement
====================
Cash Flow From Operations 15797
Capital Expenditures (PPE) 891
Cash at Beginning of Period 3016
Cash at End of Period 6438
Current Stock Price: $25.23
Current Fiscal EPS Year Estimate: 1.2
Next Fiscal EPS Year Estimate: 1.28
Free Cash Flow
================
Cash Flow From Operations / Capital Expenditures
15797 / 891 = 14906
So Microsoft generated 14,906,000,000 of Cash after taking Capital
Expenditures (Plant, Property, and Equipment) into account.
Cash King Margin
=================
Free Cash Flow / Revenues
14906 / 32187 * 100 = 46.31%
So 46% of Microsoft's total Revenues ended up being Free Cash.
Diluted Earnings Per Share
===========================
Net Income / Diluted Shares
9993 / 10882 = .92
So Microsoft earned 92 cents per share.
Gross Margin
=============
(Revenues - Cost of Revenues) * 100 / Revenues
(32187 - 5686) * 100 / 32187 = 82.33%
Net Margin
===========
(Net Income / Revenues) * 100
9993 / 32187 * 100 = 31.05%
So 31.05% of Microsoft's revenues end up as profit.
Price / Earnings Ratio
=======================
Stock Price / Diluted Earnings Per Share
25.23 / .92 = 27.07
So the current stock price is $27.07 for every dollar of earnings.
Price / Earnings Growth Ratio
==============================
(Current Estimated Earnings Per Share - Diluted Earnings Per Share) * 100
/ Diluted Earnings Per Share
(1.2 - .92) * 100 / .92 = 30.68
So Microsoft's Earnings Per Share is expected to grow 30.68% by next year.
Price / Earnings Growth Ratio (looking 2 years ahead)
======================================================
Ok, this one is tricky:
Total EPS Growth over 2 years = Next Fiscal EPS - Current Diluted EPS
1.28 - 0.92 = 0.36
Total EPS Growth as a percentage =
Total EPS Growth over 2 years / Diluted Earnings Per Share
0.36 / .92 = .39 (39%)
1.39 can be used to multiply to get a 39% growth number
To annualize the 39% growth over two years, take the square root
SQRT(1.39) = 1.1806
So the annualized growth of Price to Earnings over 2 years is 18.06%
Does this sound correct?
Fool Ratio
===========
Price to Earnings / P/E Growth Ratio
27.07 / 30.68 = 0.88
With the
Fool Ratio Tend To
.50 or less Buy
.50 to .65 Look to buy
.65 to 1.00 Watch (or "hold")
1.00 to 1.30 Look to sell
1.30 to 1.70 Consider shorting
Over 1.70 Short
So according to the .88 I got I should look to buy if the price goes
down, but hold for now.
Fool Ratio (2 years outlook)
=============================
Price to Earnings / P/E Growth Ratio (2 years)
27.07 / 18.06 = 1.5
According to the 2 year estimates (and the table above) I should
consider shorting and definitely sell.
A couple questions:
1. Which estimate should I give more weight to? The shorter-term
estimate that is probably more accurate, or the longer-term one that
says I should sell? (I don't actually have any MSFT stock).
2, Are there other calculations that are as important as the Fool Ratio
that I am inadventantly looking over?
3. Am I interpreting the estimated P/E ratios correctly? On
quotes.fool.com
http://quotes.fool.com/custom/fool/html-estimates.asp?currticker=msft&symbols=msft
It lists 1.2 as the "This Fiscal" mean estimate, which I am interpreting
to mean the estimate for the P/E ratio on September 30, 2004.
It lists 1.28 as the "Next Fiscal" mean estimate, which I am
interpreting to mean the estimate for the P/E ratio on September 30,
2005.
Am I correct?
Thanks very much for spending the time to read this post, and for
helping us newbies understand things a little better.
-Nick