Radio Transcript, 2 minutes 25 seconds, for use during week
of Oct. 15.
Description: Penny and Ira discuss financial ratios and
making stock investment decisions.
Announcer: Invest Wisely comes to you from Iowa State University
Extension through a grant from the Investor Protection Trust,
providing investor education on the web at: investorprotection.org.
Ira: Penny, I know that I need to research stocks before I buy
and calculate financial ratios based on the information I’ve
Penny: Yes. Researching and figuring financial ratios
can help you evaluate a firm’s performance, profitability,
debt, and ability to generate cash, all factors in telling you
what a company’s strengths and weaknesses are and whether
it might be the right investment for you.
Ira: If I’m looking for, say, an income stock rather than
a growth stock, will that affect what financial ratios I look
Penny: It can. For example, for income stocks, you might
look for a higher dividend yield and a lower debt ratio. For
a growth stock, you’d want earnings per share increasing
at a faster rate and a lower dividend yield because with growth
stocks, earnings are reinvested back into the firm.
Ira: How does a particular ratio help me make a decision?
Penny: Choose a benchmark with which to compare a company’s
Ira: Such as?
Penny: You could compare the ratios for the same company over the
last several years. For example, if the company’s
revenue, earnings and return on equity have increased steadily
over time, that’s a very positive sign.
Ira: Ok. That makes sense. Are there other benchmarks
I could look at?
Penny: It can also be helpful to compare a company’s current
ratios to those of other companies in the same industry.
Ira: So, to sum up, it’s important for me to research
stocks I’m interested in, to calculate the financial ratios,
to benchmark those ratios to the company’s own past and
other similar firms and to make decisions based on my particular
Penny: And remember, individual stocks are appropriate investments
for very few investors. Many people don’t have the
resources to adequately diversify or the time to research individual
stocks. In those cases mutual funds which cover the market
may be a better alternative.
Ira: Thanks, Penny. As always, your advice is very helpful.
Penny: You’re welcome. And remember, for more information
visit the ISU Extension website at extension.iastate.edu and
look for Invest Wisely.