Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 235

indicated otherwise. Should you have run out and sold you Cisco shares? Maybe. But remember that ratios are just one angle of valuing stocks, and they should always be considered in relation to other factors such as how a stock's valuations fare versus others in the same industry. Some may have argued that indeed Cisco's stock was right on (or even undervalued) given its sequential growth potential. This argument begs the investors not just look at its one-year growth but its potential in five or even ten years where its stock price can be justified based on this long-term forecast. Of course chances are that by the time you reach the five or ten-year mark, the stock price has grown substantially with investors again looking another five or ten years down the road. Again the PEG ratio cannot be applied to all stocks broadly but perhaps to those with high earnings growth potential in rapidly expanding industries such as the high-tech during the 90s. And once again, since this ratio is based on past performance there are no future guarantees. And in Cisco's case such statement became painfully true for the many investors who lost money with this stock. Obviously companies with zero or negative earnings do not have meaningful PEG ratios. Investors must rely on other factors (such as estimate, sentiments, and luck) to value their stocks.

Financial Strength

The financial data of a company indicate its financial health and its ability to maintain its operations and growth.

Current Ratio - This is a company's current assets divided by its year-ahead liabilities. This is a test for the strength of the company to meet its expected 12-month liabilities. Liabilities include items such as note payments (i.e., interest payments to bond holders), loan payments, and accounts payable. Obviously a company that is not able to meet these obligations would be in risk of bankruptcy, underlining the


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