Week of March 5th
To Make a Valid Claim You Must Evaluate Evidence Using a Warrant
In order to make an argument, you must—
- Address the issue
- Make a Valid Claim Based on the Issue
- Provide Credible Evidence
- Interpret the Evidence Using a Warrant
Address the Issue
The issue for the assignment that your boss wants you to compare a company that he selected to acompany of your choosing within the same industry. This comparison is achieved through what is known as a comparative financial analysis. To make a comparison, you will need to analyze (evaluate) five indices financialstrength:
- Stock price for one year, six-months, and intraday - Market Demand
- Quick ratio – Liquid Assets
- P/E ratio – Performance
- Net income for three years - Growth
- Earnings per share (EPS) - Profitability
Make a Valid Claim Based on the Issue
Once you have analyzed (evaluated) each company based on their financial indices, you will need to make a claim. Overall, which company is in a better financial position?
Provide Credible Evidence
To prove that your claim is valid, you will need to provide evidence (data). Hence, you will be required to conduct some research. As such,you will need to research the five indices of financial strength to describe the condition of each company.
Interpret the Evidence Using a Warrant
To evaluate these indices, you will first need to understand the warrant that you will be using for interpretation—you are defining how the data supports the claim.One type of warrant is a criterion, also known as a standard. A standard tells us how things ought to be. In other words, it defines what a good index ought to be. Use the following warrants to interpret your evidence.
Stock price. Use target price to compare to compare each stock over a 1-year period. Analysts use target price as an expectation of the stock’s value over a period of time. Look at the target price from last year and ask yourself, did each company meet analysts’ expectations?
Quick ratio.A quick ratio is defined as a company’s ability to pay off short-term liabilities (debt). The standard for a quick ratio is 1. This standard means that they have $1 for every $1 of liabilities or 1:1 and they can cover their short-term liabilities. Think of it like this: if a company has a quick ratio of 2.1,it means they have $2.10 of liquid assets to cover each $1 of liabilities. Conversely, if a company has a quick ratio of .80, it means they have $.80for every $1 of liabilities—in essence, they do not have the liquid assets to cover their short-term liabilities.Some additional notes on quick ratio: ideally, you want to have a quick ratio as close to 1 as you can without going under—this typically means that the company is spending money efficiently to grow the business. That said, if you have too high of a quick ratio you, may sitting on too much cash—cash that could be spent paying dividends to investors or growing the business.
P/E ratio.The simplest explanation of a P/E ratio the price an investor is willing to pay for $1 of earnings. For example, if a company’s P/E is 30, then an investor is willing to pay $30 for $1 of earnings. When evaluating a P/E use the industry average--you can also use 20-25 times earnings (EPS) as a benchmark. If a P/E is higher than the average, it could mean that investors are expecting higher growth in the future; thus, they are willing to pay a premium for each share. A lower P/E could mean that the stock is undervalued or that investors have a lower confidence level that the stock has a high potential for future growth.
Net income.Net income is the company’s total profit.Net income varies widely. To make an accurate comparison, look at the overall grow as a percent change over time (for this assignment you will use a three year period). Ask yourself, which company’s profits are growing faster?
Earnings per share.EPS is the profitability of a company. A side-by-side comparison of two companies based on the EPS can be helpful, particularly when each company is in the same industry; however, when considering EPS, you should also look that the P/E ratio to determine, which stock has more investor confidence.