The Hype of the Market
By Ray Mullaney
Originally published in Senior Digest
“Who Ya Gonna Believe, Me or Your Lying Eyes?”
-attributed to Groucho Marx and Richard Prior
How do you know how much to pay for a share of stock? – I’ll get to that next month.
But this month, let’s review “how to evaluate the performance of a company”. I don’t mean look at its share price, let’s evaluate the actual changes on the balance sheet of a company.
Let’s review the average performance of Amazon, Apple and Microsoft over a three-year period, starting with what we now see on their financial statements on 5-15-15, 3 years ago.
Rather than look at them one by one, I’ve added their three primary measures you can read on their income statements and balance sheets.
These three companies have averaged 35% growth in their combined revenues over the last three years – not bad. But the price of that revenue growth was very high: their debts nearly doubled over the same period. Furthermore, instead of growing, their tangible equity actually declined! Are these really the signs of companies in pristine financial condition?
There are many other companies on the market which would make better investment opportunities. We found ten with comparable price-to-sales ratios: Durect, Pure Storage, Akamai Technologies, Vanda Pharmaceuticals, Grand Canyon Education, Trex Co, Heska, SPS Commerce, OraSure Technologies and Financial Engines. Unlike the Apple trio above, these companies experienced real growth:
Growing debts, growing equity and debts growing much slower than either of them: these companies are much safer than Apple and co.
Next article, “Gee, how far can you spit anyway?” Aunt Angie.