Understanding Bonds

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 gathered. 

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 at?

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 financial ratios.

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 financial goals.

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.