The Stock Investor's Pocket Calculator: A Quick Guide to All the Formulas and Ratios You Need to Invest Like a Pro

250 Pages·2007·2.75 MB·English

by  Michael C. Thomsett

The Stock Investor’s
Pocket Calculator
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The Stock Investor’s
Pocket Calculator
A Quick Guide to All the
Formulas and Ratios You Need
to Invest Like a Pro
Michael C. Thomsett
AmericanManagementAssociation
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Shanghai•Tokyo•Toronto•Washington,D.C.
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LibraryofCongressCataloging-in-PublicationData
Thomsett,MichaelC.
Thestockinvestor’spocketcalculator:aquickguidetoalltheformulasandratios
youneedtoinvestlikeapro/MichaelC.Thomsett.
p. cm.
Includesindex.
ISBN-13:978-0-8144-7460-0
ISBN-10:0-8144-7460-8
1. Investments—Mathematics. 2. Investment
analysis—Mathematics. 3. Businessmathematics. I. Title.
HG4515.3.T463 2007
332.63(cid:2)2201513—dc22
2007010455
(cid:2)2007MichaelThomsett.
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Contents
Introduction
TheBasicDollarsandCentsProblem:OvercomingtheNumbers 1
Chapter1
RatesofReturnon Investment:WhatGoesIn,WhatComesOut 5
Chapter2
ReturnsonCapital:Putting CashtoWork 23
Chapter3
LeverageandRisk Analysis:MaximizingOtherPeople’sMoney 41
Chapter4
Long-TermTrends:PatienceRewarded 61
Chapter5
CoreEarningsandNetWorthAdjustments:MakingtheNumbers
Real 89
Chapter6
Fundamentals:BalanceSheet TestsYouNeedtoKnow 109
Chapter7
Fundamentals:OperatingStatementTestsYouNeedto Know 133
Chapter8
Technicals:PriceandVolumeCalculations 153
Chapter9
CombinedTesting:MergingPriceandFinancialTests 175
Chapter10
Taxationof Investments:UncleSam’sShare 191
v
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vi Contents
AppendixA
StockMarketFormulas:Summarizingthe Essentials 201
GlossaryofTerms 225
Index 237
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The Stock Investor’s
Pocket Calculator
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I N T R O D U C T I O N
The Basic Dollars
and Cents Problem
Overcoming the Numbers
Y
ou have so many different ways
ofcalculating‘‘profit’’or‘‘yield’’
or ‘‘return’’ that no clear, simple answer will suffice. It is different
ineachsituation.
Figuringoutthemathematicalaspectsofinvestingmoneydoes
nothaveto bedifficultorconfusing.It is madesoby(a)thevaria-
tion and unnecessary complexity of statements you receive from
brokerage firms and mutual funds; (b) the cross-use of terms
meaning approximately the same thing; and (c) the often mislead-
ing claims made in ads about the kinds of rates you can expect to
earn(orwouldhaveearnedifonlyyouhadinvestedfiveyearsago).
None of these calculations are complicated at all. This book
attemptstosortthroughthe confusionand presentyouwithame-
thodical, logical, and easy way to figure out the answers and inter-
pret what you read and hear. Each chapter tackles a specific topic
and provides examples of formulas in context. The topics covered
include ‘‘returns’’ (return on investment and return on capital,
which are not always the same); how leverage changes the equa-
tion; calculations over the long term; adjusting for what corpora-
1
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