Financial Ratios Quotes

Moderately fast growers (20 to 25 percent) in nongrowth industries are ideal investments. • Look for companies with niches. • When purchasing depressed stocks in troubled companies, seek out the ones with the superior financial positions and avoid the ones with loads of bank debt. • Companies that have no debt can’t go bankrupt. • Managerial ability may be important, but it’s quite difficult to assess. Base your purchases on the company’s prospects, not on the president’s resume or speaking ability. • A lot of money can be made when a troubled company turns around. • Carefully consider the price-earnings ratio. If the stock is grossly overpriced, even if everything else goes right, you won’t make any money. • Find a story line to follow as a way of monitoring a company’s progress. • Look for companies that consistently buy back their own shares.

(Basel Accords) to set capital ratios. Under these guidelines, the

company and for similar companies in the same industry. • The percentage of institutional ownership. The lower the better. • Whether insiders are buying and whether the company itself is buying back its own shares. Both are positive signs. • The record of earnings growth to date and whether the earnings are sporadic or consistent. (The only category where earnings may not be important is in the asset play.) • Whether the company has a strong balance sheet or a weak balance sheet (debt-to-equity ratio) and how it’s rated for financial strength. • The cash position. With $16 in net cash, I know Ford is unlikely to drop below $16 a share. That’s the floor on the stock. SLOW GROWERS • Since you buy these for the dividends (why else would

A good metric is a ratio or a rate. Accountants and financial analysts have several ratios they look at to understand, at a glance, the fundamental health of a company. You need some, too. There are several reasons ratios tend to be the best metrics: • Ratios are easier to act on. Think about driving a car. Distance traveled is informational. But speed—distance per hour—is something you can act on, because it tells you about your current state, and whether you need to go faster or slower to get to your destination on time. • Ratios are inherently comparative. If you compare a daily metric to the same metric over a month, you’ll see whether you’re looking at a sudden spike or a long-term trend. In a car, speed is one metric, but speed right now over average speed this hour shows you a lot about whether you’re accelerating or slowing down. • Ratios are also good for comparing factors that are somehow opposed, or for which there’s an inherent tension. In a car, this might be distance covered divided by traffic tickets. The faster you drive, the more distance you cover—but the more tickets you get. This ratio might suggest whether or not you should be breaking the speed limit.

Liquidity ratios are used to determine how easily a company will be able to meet its short-term financial obligations.

Imagine a bank with $1 trillion in mortgage assets and $25 billion in capital, a 40:1 leverage ratio. To get it to a much safer 20:1 leverage ratio, the government could buy $500 billion of its assets, which would drain most of TARP on one institution. Or it could inject $25 billion in additional capital, achieving the same ratio with one-twentieth of the cash.

The relationship of current assets to current liabilities is called the current ratio.

With such theories, economists developed a very elaborate toolkit for analyzing markets, measuring the "variance" and "betas" of different securities and classifying investment portfolios by their probability of risk. According to the theory, a fund manager can build an "efficient" portfolio to target a specific return, with a desired level of risk. It is the financial equivalent of alchemy. Want to earn more without risking too much more? Use the modern finance toolkit to alter the mix of volatile and stable stocks, or to change the ratio of stocks, bonds, and cash. Want to reward employees more without paying more? Use the toolkit to devise an employee stock-option program, with a tunable probability that the option grants will be "in the money." Indeed, the Internet bubble, fueled in part by lavish executive stock options, may not have happened without Bachelier and his heirs.

The power of ratios lies in the fact that the numbers in the financial statements by themselves don’t reveal the whole story.

As the banks took over the securities, the ratios between their capital and their assets lurched down towards their regulatory minima. Central banks in the United States and Europe sought to alleviate the pressure on the banks with interest rate cuts

Nowadays he is best remembered for the Fibonacci sequence of numbers (0, 1, 1, 2, 3, 5, 8, 13, 21 . . .), in which each successive number is the sum of the previous two, and the ratio between a number and its immediate antecedent tends towards a ‘golden mean’ (around 1.618). It

The limitation on this system was simply that the Exchange Bank maintained something close to a 100 per cent ratio between its deposits and its reserves of precious metal and coin. As late as 1760, when its deposits stood at just under 19 million florins, its metallic reserve was over 16 million. A run on the bank was therefore a virtual impossibility, since it had enough cash on hand to satisfy nearly all of its depositors if, for some reason, they all wanted to liquidate their deposits at once. This made the bank secure, no doubt, but it prevented it performing what would now be seen as the defining characteristic of a bank, credit creation.

the creation of expectations about future growth is a crucial role for government, and not just during downturns. It is why mission-oriented innovation policy—bringing Keynes and Schumpeter together—has such an important role to play in driving stronger economic performance. Indeed, Keynes argued that the ‘socialisation of investment’—which, as Mazzucato suggests, could include the public sector acting as investor and equity-holder—would provide more stability to the investment function and hence to growth.53 It is because public expenditure is critical to the co-production of the conditions for growth, as Kelton highlights, that the austerity policies which have reduced it in the period since the financial crash have proved so futile, increasing rather than diminishing the ratio of debt to GDP. And as Wray and Nersisyan emphasise, the endogenous nature of money created by ‘keystrokes’ in the banking system gives governments far greater scope to use fiscal policy in support of economic growth than the orthodox approach allows.

it appears the company has a strong competitive position with a favorable long-term outlook, you would next run several dividend discount models that include different growth rates of the company’s owner earnings over different time periods to get a sense of approximate valuation. Then you would study and understand management’s long-term capital allocation strategy. Last, you might call a few friends, colleagues, or financial advisers to see if they have an opinion about your company or, better yet, your company’s competitors. Take note: None of this requires a high IQ, but it is more laborious and requires more mental effort and concentration than simply figuring out the company’s current price-to-earnings ratio.

Expense Ratio. This expense is the main “price tag”—the number they want us focused on.

Capitalization Rate = Net Operating Income / Current Market Value The capitalization rate or “cap rate” is another commonly referenced ratio for expressing the investment value of cash flowing assets. A cap rate between 5 percent and 10 percent is considered a good investment.

Rule 1—Low debt Rule 2—High current ratio Rule 3—Strong and consistent return on equity Rule 4—Appropriate management incentives.

In the current economy, for most students, colleges couldn’t possibly deliver on providing hundreds of thousands of dollars’ worth of anything. Wages aren’t budging, even though corporate profits have soared. The average CEO now makes 271 times the salary of the average American worker, whereas in 1965, the ratio was twenty-to-one. Healthcare costs are staggering—per capita health spending has increased twenty-nine times over the past four decades—and childcare costs are rising like college tuition, even as the frontline workers in both healthcare and childcare often receive poverty wages. A college degree is no guarantee of financial stability.

Adequate Size of the Enterprise All our minimum figures must be arbitrary and especially in the matter of size required. Our idea is to exclude small companies which may be subject to more than average vicissitudes especially in the industrial field. (There are often good possibilities in such enterprises but we do not consider them suited to the needs of the defensive investor.) Let us use round amounts: not less than $100 million of annual sales for an industrial company and, not less than $50 million of total assets for a public utility. 2. A Sufficiently Strong Financial Condition For industrial companies current assets should be at least twice current liabilities—a so-called two-to-one current ratio. Also, long-term debt should not exceed the net current assets (or “working capital”). For public utilities the debt should not exceed twice the stock equity (at book value). 3. Earnings Stability Some earnings for the common stock in each of the past ten years. 4. Dividend Record Uninterrupted payments for at least the past 20 years. 5. Earnings Growth A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end. 6. Moderate Price/Earnings Ratio Current price should not be more than 15 times average earnings of the past three years.

Size is more than ample for each company. Financial condition is adequate in the aggregate, but not for every company.2 Some dividend has been paid by every company since at least 1940. Five of the dividend records go back to the last century. The aggregate earnings have been quite stable in the past decade. None of the companies reported a deficit during the prosperous period 1961–69, but Chrysler showed a small deficit in 1970. The total growth—comparing three-year averages a decade apart—was 77%, or about 6% per year. But five of the firms did not grow by one-third. The ratio of year-end price to three-year average earnings was 839 to $55.5 or 15 to 1—right at our suggested upper limit. The ratio of price to net asset value was 839 to 562—also just within our suggested limit of 1½ to 1.

Lesbianism and male homosexuality also appear to be quite different: Male sexual orientation tends to appear early in development, whereas female sexuality appears to be more flexible or fluid over the lifespan (B aumeister, 2000). Future theories should attend to the large individual differences within those currently classified as lesbian and gay. For example, mate preferences vary across lesbians who describe themselves as “butch” as opposed to “femme” (B ailey et al., 1997; B assett, Pearcey, & Dabbs, 2001). Butch lesbians tend to be more masculine, dominant, and assertive, whereas femme lesbians tend to be more sensitive, cheerful, and feminine. The differences are more than merely psychological; butch lesbians, compared to their femme peers, have higher levels of circulating testosterone, more masculine waist-to-hip ratios, more permissive attitudes toward casual sex, and less desire to have children (S ingh, Vidaurri, Zambarano, & Dabbs, 1999). Femme lesbians place greater importance than butch lesbians on financial resources in a potential romantic partner and experience sexual jealousy over rivals who are more physically attractive. Butch lesbians place less value on financial resources when seeking partners but experience greater jealousy over rival competitors who are more financially successful. The psychological, morphological, and hormonal correlates imply that butch and femme are not merely arbitrary labels but rather reflect genuine individual differences.

What are you trying to buy? Asset type? Size? Price? To determine the answer to the first question, do the following: Start with your own net worth. Add in friends and family. The total team net worth is your starting point. Choose a market. Consider travel time and expense. You must be able to be in your market to look at deals at least once a month. Determine the viability of your market. Job growth? Population growth? Get deal flow from the market. Real estate agents Find all commercial realty companies in the city. Get on all their mailing lists. Analyze deals online from realtors in the area. Call the realtors about their listings. Direct to owners Get lists of owners. Create a system to reach owners directly. Mail Text Cold calling Analyze deals. Income approach Income – Expenses = Net operating income Net operating income – Debt service = Cash flow Check with lenders for current terms on debt. What is the CoC return? Cap rate? Debt ratio? Comparable data Check the analyzed cap rate against cap rates in the area for similar properties. Check comparable sale prices. Comps should be close in size and age to the subject property. Comps should have similar amenities. Comps should be within a few miles of the subject property. Exit Hold and operate. Refinance. Sell or flip. Consider upcoming market conditions. Debt Check with lenders or a mortgage broker to determine the availability of loans for this type of property. What are the terms and conditions? Is this the information you used to analyze the deal originally? Make the offer. Use an LOI to submit the offer in writing. The LOI will summarize the main deal points. If your offer is less than 15 percent of the asking price, speak with the realtor before you submit the offer. Once the offer is accepted, send the LOI to your attorney and have them draft the purchase agreement. Draft the purchase and sale agreement. Now that you have a fully executed contract, the clock starts. Earnest money goes into escrow. Do your due diligence. Financial inspection Physical inspection Lease audit Begin your loan application. The lender will complete three inspections. Appraisal Environmental inspection Physical engineer inspection of the buildings Do your closing. The lender will wire the loan proceeds to the closing escrow. Wire your down payment funds to the closing escrow. You own a new property! Engage property management for takeover of operations.

Another impressive ratio is Altman Z-Score. Discovered in 1968 by Edward Altman, this quotient measures the probability of a company going into bankruptcy within two years. Over the last few decades, the formula has proven to be highly accurate. It was originally developed for public manufacturing companies, with other versions for private and non-manufacturing organizations becoming available later. The original Z-Score formula was as follows: Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 0.99X5 Where: X1 = Working Capital / Total Assets X2 = Retained Earnings / Total Assets X3 = Earnings Before Interest and Taxes / Total Assets. X4 = Market Value of Equity / Book Value of Total Liabilities. X5 = Sales / Total Assets. If Z > 2.99, the company is in the Safe Zone.

What we want is a company that increases profits (and hopefully dividends) each year and where the rating (PE ratio) that the stock market/investors place on the company's shares increases significantly. This is the 'double whammy' any investor should be seeking.

The success, growth and integrity of the company (and thus your investment) is tied inextricably to the personality, abilities and ambitions of the chairman and/or chief executive. If he owns a flashy BMW with personalised number plates, drips with gold jewellery and has ambitions to own the local football club - bad news. But a conservative car, gentleman's shoes, love for cricket, faded regimental tie and membership of the local school board spell good news. I exclude from all this the 30-year old, multi-millionaire, whiz-kid creators of IT companies on price/earnings ratio of 50-plus. These live on a different planet from me, anyway, so normal judgements and personality tests do not apply.

Endeavour to buy shares on modest valuations - hopefully with an attractive yield and single-figure price earnings ratio and/or discount to net asset value/real worth.

It’s easy to convince oneself that the facilities and guard-to-prisoner ratio at Halden would pose a financial differential insurmountable for American states. A closer look reveals that the reality is far more nuanced.

Rules, no matter how enveloping, will never deliver an exceptional customer experience. Colleen Barrett, who in her forty-seven-year career at Southwest served as head of marketing, customer service, people, and operations, describes the airline’s approach to rules: “The rules are guidelines. I can’t sit in Dallas, Texas, and write a rule for every single scenario you’re going to run into. You’re out there. You’re dealing with the public. You can tell in any given situation when a rule should be bent or broken. You can tell because it’s simply the right thing to do in the situation you are facing.” 17 Backing up this freedom is a concerted effort to ensure every team member has the information needed to think and act like an owner. At Southwest, training programs cover industry economics, financial ratios, profitability drivers, and more. By investing in the judgment of its people, Southwest creates a business that is smarter, more innovative, and more profitable.

Investors are connected to today’s consumers and producers through financial institutions and markets. The balance is a delicate one. When financial markets crash, investors can curtail the flow of capital to enterprise. Demographics are fundamental to the equation. As the world’s life expectancy grows, the need to save grows as well. As the world population ages, the ratio of producers to consumers declines. Finance not only intermediates the present and the future, it also intermediates between the young and the old.

When it comes to investing, the saying ‘don’t put all your eggs in one basket’ couldn’t be truer, especially regarding the diversification of one’s investments. This phrase originates from a tale about a farmer who had a basket of eggs and was carrying it to market to sell. Along the way, he stumbled, and the basket fell, breaking all the eggs. The farmer learned from the bitter experience as he knew that it was foolish to put all of his eggs in one basket. So, he decided to distribute the eggs between more baskets so that if he lost one basket, he still had eggs to sell.

YouTube also contains a treasure trove of lectures by nearly all of finance’s leading lights, strewn throughout its vast wasteland of misinformation. Tread carefully. A few wrong clicks and you’ll wind up with a QAnon conspiracist or a crypto bro. Of the names I’ve mentioned in this book, I’d search for John Bogle, Eugene Fama, Kenneth French, Jonathan Clements, Zvi Bodie, William Sharpe, Burton Malkiel, Charles Ellis, and Jason Zweig. Worthwhile finance podcasts abound. Start with the Economist’s weekly “Money Talks” and NPR’s Planet Money, although most of the latter’s superb coverage revolves around economics and relatively little around investing. Rick Ferri’s Boglehead podcast interviews cover mainly passive investing. Another financial podcast I highly recommend is Barry Ritholtz’s Masters in Business from Bloomberg. Podcasts are a rapidly evolving area. Lest you wear your ears out, you’ll need discretion to curate the burgeoning amount of high-quality audio. Research mutual funds. All the fund companies discussed in this book have sophisticated websites from which basic fund facts, such as fees and expenses, can be obtained, as well as annual and semiannual reports that list and tabulate holdings. If you’re researching a large number of funds, this gets cumbersome. The best way is to visit Morningstar.com. Use the site’s search function to locate the main page for the fund you’re interested in and click the “Expense” and “Portfolio” tabs to find the fund expense ratio and detailed data on the fund holdings. Click the “Performance” tab to see the fund’s return over periods ranging from a single day up to 15 years, and the “Chart” tab to compare the returns of multiple funds over a given interval. ***

Sears Roebuck and Co vs Wal Mart Stores Inc - This case is designed to familiarize students with the use of financial ratios. Two retailers, Sears, Roebuck and Co. and Wal-Mart Stores, Inc., have a

Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet”. You

The resulting financial overhead consists of claims on the economy’s actual means of production. Yet most people think of these bonds, bank loans and stocks and creditor claims as wealth, not its antithesis on the debit side of the balance sheet. This inside-out doublethink is a precondition for the bubble economy to be applauded by the mass media, keeping its corrosive momentum expanding. From the corporate sphere and real estate to personal budgets, the distinguishing feature over the past half-century has been the rise in debt/equity and debt/income ratios. Just as debt leveraging has hiked corporate break-even costs of doing business, so the cost of living has been increased as homes and office buildings have been bid up on mortgage credit. “Creating wealth” in a debt-financed way makes economies high-cost, exacerbated by the tax shift onto labor and consumers instead of capital gains and “free lunch” rent. These financial and fiscal policies have enabled financial managers to siphon off the industrial profits that were expected to fund capital formation to increase productivity and living standards. The

The 8 Basic Headers Work Family & Kids Spouse Health & Fitness Home Money Recreation & Hobbies Prospects for the Future Work The Boss Time Management Compensation Level of interest Co-workers Chances of promotion My Job Description Subordinates Family Relationship with spouse Relationship with children Relationship with extended family Home, chores and responsibilities Recreation & hobbies Money, expenses and allowances Lifestyle and standard of living Future planes and arrangements Spouse Communication type and intensity Level of independence Sharing each other's passions Division of roles and responsibilities Our time together Our planes for our future Decision making Love & Passion Health & Fitness General health Level of fitness Healthy lifestyle Stress factors Self awareness Self improvement Level of expense on health & fitness Planning and preparing for the rest of my life Home Comfort Suitability for needs Location Community and municipal services Proximity and quality of support/activity centers (i.e. school. Medical aid etc) Rent/Mortgage Repair / renovation Emotional atmosphere Money Income from work Passive income Savings and pension funds Monthly expenses Special expenses Ability to take advantage of opportunities / fulfill dreams Financial security / resilience Financial IQ / Understanding / Independent decision making Social, Recreation & Hobbies Free time Friends and social activity Level & quality of social ties Level of spending on S, R&H Culture events (i.e. theater, fairs etc) Space & accessories required Development over time Number of interests Prospect for the future Type of occupation Ratio of work to free time Promotion & Business development (for entrepreneurs) Health & Fitness Relationships Family and Home Financial security Fulfillment of vision / dreams  Creating Lenses with Excel If you wish to use Excel radar diagrams to simulate lenses, follow these steps: Open a new Excel spreadsheet.

Number of interests Prospect for the future Type of occupation Ratio of work to free time Promotion & Business development (for entrepreneurs) Health & Fitness Relationships Family and Home Financial security Fulfillment of vision / dreams

in only one of these episodes (Swaziland, 1985) did the debt ratio decline primarily because the country “grew” out of its debts! Growth was also the principal factor explaining the decline in debt ratios in three of the fifteen default or restructuring cases: those of Morocco, Panama, and the Philippines. Overall, this exercise shows that countries typically do not grow out of their debt burden, providing yet another reason to be skeptical of overly sanguine standard sustainability calculations for debt-intolerant countries.

great company is not a great investment if you pay too much for the stock. The more a stock has gone up, the more it seems likely to keep going up. But that instinctive belief is flatly contradicted by a fundamental law of financial physics: The bigger they get, the slower they grow. A $1-billion company can double its sales fairly easily; but where can a $50-billion company turn to find another $50 billion in business? Growth stocks are worth buying when their prices are reasonable, but when their price/earnings ratios go much above 25 or 30 the odds get ugly:

in 1950 there were 14 retired persons for every 100 workers in the United States. This ratio rose to 28 retirees per 100 workers in 2013, and by 2060 it is expected to rise to 56.

Commonly used appraisal methods are as follows: [a] Payback Period. [b] Average Rate of Return. [c] Discounted Cash Flow Techniques: [i] Net Present Value. [ii] Benefit Cost Ratio. [iii] Internal Rate of Return.

Few industries have enough cash to cover their debt without having to count on selling inventory or converting receivables to cash.   A healthy cash ratio is considered to be between 0.5 and 1.   Liquidity ratios are helpful way to measure if a company is at risk of not being able to pay its debt. However, some critics point out that those ratios are past-oriented and cannot predict future cash problems.   Also, such ratios can be misleading because of creative accounting practices (a topic we will cover later on), especially because accounts receivable might be inflated or inventory could be wrongly estimated.

ROE: how efficiently is the company using owner’s equity?   The return on equity (ROE) measures what amount of profit is returned as a percentage of the owner’s equity. In other words, this ratio tells us what the investors earned for their venture.

A long, fruitful retirement is a concept that’s only a few generations old. If you recall from our discussion earlier, when President Franklin Roosevelt created Social Security in 1935, the average life expectancy was just 62. And the payments wouldn’t kick in until age 65, so only a small percentage would actually receive Social Security benefits to begin with. At the time, the Social Security system made financial sense because there were 40 workers (contributors) for every retiree collecting benefits. That means there were 40 people pulling the wagon, with only 1 sitting in the back. By 2010, the ratio had dropped to only 2.9 wagon pullers for every retiree. The math doesn’t pencil out, but since when has that stopped Washington?

There is something for every investor: Whether you are a risk taker or risk averse, whether you want to invest in India or abroad, whether you want to invest in equity, debt or a combination of funds, whether you want to invest in some theme (e.g. rural, export-oriented, P/E ratio), industry (e.g. Manufacturing) or sector (e.g. Power), you will be able to do it through mutual funds. In short, it is a great investment vehicle to achieve your financial goals.

Principle 14 - Fundamental Analysis Comes to the Rescue - The core of fundamental analysis lies in examining seven indicators: 1) debt; 2) debt/equity ratio; 3) return on equity; 4) earnings growth rate; 5) price/earnings ratio; 6) price earnings growth; and 7) price/sales ratio. These seven factors are the leading fundamental analysis indicators that can help you screen stocks based on financial analysis, not emotion, and select the most profitable ones for your portfolio. p177

The two fathers present structurally the choice between two corporations, two modes of accumulation, two styles of financial masculinity. The Old Conservatism and the New Conservatism, the old patriarchy and the new patriarchy, the industrial monopoly capital of airlines and the monopoly financial capital of a corporate raider. Perhaps the film's most radical critique and uncertainty is that both paternal men are respectively ill. Gekko has the high blood pressure thats befits financial accumulation: It is able to be continually monitored, the sphygmomanomater is an instrument for the continuous conveying of exact information, diastolic and systolic ratios rise and fall in different social contexts. Bud's father is made sick by an old-fashioned, industrial heart attack - his illness is a consequence of the steady accumulation of arterial plaque.

Like spacecraft that pick up speed as they rise into the Earth’s stratosphere, growth stocks often seem to defy gravity. Let’s look at the trajectories of three of the hottest growth stocks of the 1990s: General Electric, Home Depot, and Sun Microsystems. (See Figure 7-1.) In every year from 1995 through 1999, each grew bigger and more profitable. Revenues doubled at Sun and more than doubled at Home Depot. According to Value Line, GE’s revenues grew 29%; its earnings rose 65%. At Home Depot and Sun, earnings per share roughly tripled. But something else was happening—and it wouldn’t have surprised Graham one bit. The faster these companies grew, the more expensive their stocks became. And when stocks grow faster than companies, investors always end up sorry. As Figure 7-2 shows: A great company is not a great investment if you pay too much for the stock. The more a stock has gone up, the more it seems likely to keep going up. But that instinctive belief is flatly contradicted by a fundamental law of financial physics: The bigger they get, the slower they grow. A $1-billion company can double its sales fairly easily; but where can a $50-billion company turn to find another $50 billion in business? Growth stocks are worth buying when their prices are reasonable, but when their price/earnings ratios go much above 25 or 30 the odds get ugly: Journalist Carol Loomis found that, from 1960 through 1999, only eight of the largest 150 companies on the Fortune 500 list managed to raise their earnings by an annual average of at least 15% for two decades.

the investor would need more than a mere falling off in both earnings and price to give him a sound basis for purchase. He should require an indication of at least reasonable stability of earnings over the past decade or more—i.e., no year of earnings deficit—plus sufficient size and financial strength to meet possible setbacks in the future. The ideal combination here is thus that of a large and prominent company selling both well below its past average price and its past average price/earnings multiplier. This would no doubt have ruled out most of the profitable opportunities in companies such as Chrysler, since their low-price years are generally accompanied by high price/earnings ratios. But let us assure the reader now—and no doubt we shall do it again—that there is a world of difference between “hindsight profits” and “real-money profits.” We doubt seriously whether the Chrysler type of roller coaster is a suitable medium for operations by our enterprising investor. We have mentioned protracted neglect or unpopularity as a second cause of price declines to unduly low levels. A current case of this kind would appear to be National Presto Industries. In the bull market of 1968 it sold at a high of 45, which was only 8 times the $5.61 earnings for that year. The per-share profits increased in both 1969 and 1970, but the price declined to only 21 in 1970. This was less than 4 times the (record) earnings in that year and less than its net-current-asset value. In March 1972 it was selling at 34, still only 5½ times the last reported earnings, and at about its enlarged net-current-asset value.

While this may mean that the company has enough liquidity to cover short-term bills, a current ratio of less than one does not always indicate that the company faces liquidity problems.

The current ratio measures short-term liquidity and is calculated by dividing current assets by current liabilities

If the Current Ratio falls below 2:1, it may not be an immediate cause for alarm. But for the Quick Ratio to fall below 1:1 is a very serious matter, and if corrective measures are not urgently taken, it can lead to situations of financial insolvency.

Using data collected directly from firms, economists at the Federal Reserve and Harvard Business School found that volatility in publicly traded firms’ sales growth rates and profit-to-sales ratios has increased dramatically since 1970—and that the increased volatility is reflected directly in the wages of workers within the year. In other words, firms seem to be reacting more quickly to changes in the business environment by increasing or cutting what they are paying their existing workers (not by layoffs or new hires). This connection is most pronounced in the service sector and for low-wage workers.