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Stock Fundamentals, Financial Statements, and Stock Screens (Preliminary Version)
Floyd Vest, July 2015
Investors use stock fundamentals from Corporate Financial Statements, required by the
Securities and Exchange Commission (SEC), to select stocks which hopefully yield superior
returns. Stock Screens do the same. We will consider this stock selection strategy by
investigating the Financial Statements and fundamentals for Flexsteel Industries Inc. (FLXS)
given on finance.yahoo.com. To conduct this study, go to finance.yahoo.com and enter FLXS in
Look Up. Print out the following pages: the front page, the five year graph of Flexsteel stock
prices. From the left side of front page, print out Income Statement, Balance Sheet, Cash Flow,
Analyst Estimates, and Profiles.
Flexsteel (FLXS) is a favored small cap value stock. To appreciate this investigation,
read in this course “The Remarkable History of Returns of Small Cap Stocks,” Nov. 2014 which
indicates that historically, small cap stocks have outperformed the stocks of the S&P 500 Index.
In the CRSP U.S. Small Cap Value Index (Nov. 2014) there were 806 stocks with Market
Capitalization ranging from $7,810M to $144.80M.
Market Capitalization = (Price of the Stock)  (Number of Shares Outstanding).
In the following Exercises, fundamentals from 7/25/2015 FLXS Financial Statements are
sometimes quoted. In your work, use the fundamentals from the date you look-up Flexsteel.
When appropriate, give answers in (thousands) or (millions).
Exercise #1. For FLXS, go through the Reports and mark: on the front page: Price,
Beta, Volume, Market Cap, P/E (ttm), EPS (ttm), Dividend, Dividend Yield. On Key Statistics,
mark PEG Ratio, Price/Sales (ttm), Price/Book (mrq), Profit Margin (ttm), Return on Assets
(ROA), Return on Equity (ttm), Revenue (ttm), Net Income Available to Common share holders
(ttm), Book Value Per Share (mrq), Shares Outstanding, PEG Ratio, Payout Ratio.
In the following we will estimate from basic definitions some of these fundamentals, and
apply them to estimating others. Due to the complexity of corporate accounting practices and
standards, and (ttm), some of our calculations will result in approximations for these reported
fundamentals. What does ttm mean?
Exercise #2.
Share did they use?
From the above definition, in calculating Market Cap, what Price per
Exercise #3. Value stocks are selected by the fundamental BtM (Book Value to
Market) = (Book Value) /(Market Cap). Also BtM = 1/(Price/Book). Calculate Total Book
Value. You will find Book Value per Share (mrq) on Key Statistics. Calculate BtM. You will
find Price/Book on Key Statistics. Calculate 1/(Price/Book). Compare.
Fema and French found that small cap stocks, and stocks with a high book-to-value-toprice ratio (BtM) (customarily called value stocks) tended to do better than the market. See the
References.
When comparing the BtM for two companies, the larger BtM means the value of the
company was greater in proportion to its Market Cap. For example, for FLXS, BtM = .59
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(7-2015) and for Snap On Corp. (SNA) the BtM = .295 (Nov. 2014). What does this tell you
about Flexsteel?
Exercise #4. Price/Earnings = (Market Cap)/(Earnings) = 14.08. Estimate Earnings
from the given Market Cap. This estimate for Earnings is close to what Income on the Income
Statement. Notice that the given P/E is (ttm). What does this mean? The Earnings used in
calculations varies. Compare Net Income Available to Common, Profit, Net Income from
Continuing Operations, and Operating Income.
For the S&P 500, P/E varies with the condition of the market. On 7-15-2015 it was 20.3.
Historically Mean P/E was 15.54. Max was 123.73, May 2000. What kind of P/Es might be a
better investment? Perhaps it is better to get out of the market when P/Es are too high; or if P/Es
are low, stocks are a bargain, and by historical trends are likely to increase in price.
Exercise #5. Compare the P/E for Flexsteel to similar stocks or an index such as the
Russell 2000. Interpret. Examples: Wendy’s (WEN), Rite Aid Corp (RAD), Snap-On Inc.
(SNA).
Exercise #6. Look up the Profile for FLXS and write a description of the company
including Sector and Industry. Describe its products. You could look up its website, and
Industry and Analysts’ commentary. Why would an investor do this?
Exercise #7. One important stock valuing formula discounts expected Earnings growth
G. Estimate G from whatever source you can find. See the article in this course “Stock Pricing
Models,” which involves growth in earnings per share and other statistics. You can find an
estimate for G for Flexsteel on the Analyst Statement.
Exercise #8. EPS (ttm) = (Earnings)/(Shares Outstanding). Estimate Earnings from
reported EPS. Which form of Earnings is the closest to your estimate? What does ttm mean. It
can go back as much as two years.
Exercise #9. EBIT means Earnings Before Interest and Taxes. Report EBIT. This
represents how much cash a company can generate. How much interest did Flexsteel pay?
Estimate their tax rate. Do you think this is the standard corporate income tax rate? The United
States has one of two highest corporate income tax rates.
Exercise #10. Explain the steps in the calculation of Net Income Applicable to Common
in the Income Statement.
Exercise #11. How much is Total dividend paid to shareholders?
Exercise #12. Profit Margin is reported as 4.85% (7-2015). With Profit Margin =
((Earnings) / (Revenue), which Earnings is used to calculate Profit Margin? How does Profit
Margin for FLXS compare to other stocks? For example, Wendy’s (WEN), Rite Aide Corp
(RAD), Snap-On, Inc. (SNA) or the Russell 2000. Interpret. Profit margin indicates the
profitability of the company in that it gives the percentage of sales the company has left over as
Profit after paying all expenses.
Exercise #13. Price/Book (mrq) is defined as (Market Cap)/(Book Value). Calculate
Total Book Value from Book Value per Share. What Price per Share did they use to calculate
Price/Book? Compare it to BtM (Book to Market). Book Value per Share can determine the
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Equity in a company relative to the market value of the company, which is the price of the stock.
For example, a company that is trading for $20 but has a book value per share of $10 is trading at
twice its equity.
Exercise #14. Price/Sales (PSR) is given as .67 (7-15). It is defined as (Total
Capitalization)/(Revenue). Use it to determine the Price used to calculate Price/Sales. Simplify
this formula in terms of Stock Price. Show that P/S = (P/E)  (Profit Margin).
P/E is the common evaluation of the level of price. But, Earnings are complex. Some
people use Price/Sales, but it contains no information on a company’s debt.
Exercise #15. Return on Equity (ROE) (ttm) is reported as 12.98% (7-15).
Equity = (Price per Share)  (Outstanding Shares) = Total Capitalization. ROE is defined as
(Earnings)/(Equity). Simplify it in terms of EPS and Price. What Price per Share did they use to
calculate the reported ROE? From what date did this Price per Share come? What did ttm
mean? ROE tells the number of dollars of profit the company can earn for each dollar of
shareholder equity.
From the bottom of Balance Sheet, for June 30, 2014, Total Stockholder Equity =
166,735(thousands). What Price per Share did they use to calculate it? What date did it come
from?
Exercise #16. ROA (Return on Assets) (ttm) is defined as (Earnings)/(Assets). Use the
reported ROA of .0950 and Assets from Balance Sheet to calculate Earnings. Assets from what
date gives a number closest to Earnings on the Income Statement? ROA tells the number of
dollars of profit the company can make for each dollar of assets. It applies to comparing
companies in the same industry, since ROA varies extensively from one industry to another. For
example Railroads have a low ROA. Companies which require limited assets will have a greater
ROA. Compare ROA to ROE.
Exercise #17. Estimate the PEG Ratio which is defined as (P/E)/G. What is G as
reported for the past five years? See Analyst Estimates. What did the analyst say about PEG
Ratio? What did the PEG Ratio for Flexsteel suggest? At one time, the PEG Ratio for the
S&P 500 was 1.21 . The P/E Ratio of a company that is fairly priced is equal to its
growth rate in earnings G. With P/E = G, the PEG Ratio = (P/E)/G = 1. Use G as a percent.
What is the PEG Ratio for Rite Aid Corp (RAD)?
Exercise #18. Interpret the Beta for FLXS. What does Volume mean? Why would an
investor be interested in Volume? In comparison to a selected index for which Beta = 1, given
Beta = 1.15, if the market drops, the stock will drop 15% more, if the market rises, the stock will
rise 15% more. See the article in this course “Measures of Risk and Performance for Mutual
Funds, Beta, Alpha, and Sharpe Ratio,” Sept. 2011. Search: Beta on moneychip.com and discuss
Beta for Flexsteel.
Exercise #19. Report the statistics for Vanguard Small Cap Value ETF (VBR). What
index does it passively follow?
Exercise #20. Price/book Ratio (mrq) could be calculated as (Closing Price)/(Book
Value per Share). Calculate Book Value = Assets – Liabilities. By definition Price/Book =
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(Total Capitalization)/(Book Value). Show that this is equal to (Price)/(Book Value per Share).
What Price did they use to calculate Price/Book?
Side Bar Notes:
For history of the S&P 500 Index of stocks with total return, “average” return, adjusted
for inflation return, and standard deviation, see moneychimp.com, Improved CAGR.
Dividend payout ratio = Dividend per share/ EPS = Total Dividends/Total Earnings. The
amount that is not paid out in dividends is held by the company for growth. What is the
Dividend payout ratio for Flexsteel?
AAII.com runs and examines the success of over 60 stock screens and runs twelve index
composites. Some of their screens are named after the investment style of famous investors such
as Lynch, Neff, Buffet, Templeton, and Graham. They have a small cap value screen resulting in
the Shadow Stock (hypothetical) Portfolio. Their Piotroski: High F-Score screen is a pure value
screen with an annualized return from the start of 1998 of 30%. (Jan. 2015) . See
stockopedia.com, Search: Piotroski F-Score.
CRSP (The Center for Research in Security Prices), Chicago Booth Business School,
University of Chicago. Go to crsp.com and click your way around to see what you can learn.
You can read about the CRSP U. S. Small Cap Value Index. They feature the work of highly
regarded investment researchers Fama and French. CRSP maintains the most complete data base
for stocks, bonds, and mutual funds.
Why historical studies may not represent the future. Foster and Kaplan, in a study of the
S&P 500, found that for the 500 companies in 1957, the original S&P 500, only 74 remained in
in 1997. Only 12 beat the index from 1957 to 1998 (ifa.com). Dividend yields have been much
lower as compared to the past.
An enhanced value strategy. There are several strategies which coordinate with value
investing which enhance the returns of a portfolio. Novy-Marx (2013) finds that gross
profitability (revenue minus cost of goods sold, scaled by assets) along with traditional metrics
does this. A simple value strategy does not distinguish between companies that are profitable
and those that are not. Including value and profitability in selecting stocks is a better value
strategy. This applies particularly to small cap stocks. (Search the internet for Robert NovyMarx, “The Quality Dimension of Value Investing,” University of Illinois at Chicago.) There
are funds which incorporate this and other strategies, such as momentum, to generate larger
abnormal returns. Momentum involves stocks which performed well recently. Historical studies
have shown that such stocks are likely to perform well for a period of time. For Flexsteel,
calculate revenue minus costs of goods sold, scaled by assets. Do that for Snap-On, Inc. (SNP)
and discuss.
Small stocks slip into a correction. In the four weeks ending Oct. 1, 2014, the Russell
2000 small cap index dropped more than 10%. As of Oct. 1, for one month, the S&P was down
2.7%. (Money, Nov. 2014, page 102)
Historical data and back testing. Search the internet for back testing a theory about
stocks. Read about problems with back testing. See “Fool’s Gold: Why Most Back-Tested
Fund Performance Histories are Bunk,” Morningstar. See Charles D. Ellis, “The Rise and Fall of
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Performance Investing,” Financial Analysts Journal, July/August, 2014, pages 14 to 23. See
Wikipedia.org, backtesting (one word), and check the references.
Back testing for better stock returns has resulted in over 200 discoveries in the last 15
years. They identify factors such as company size that are associated with out performance.
Many mutual funds are sold based on claims of such factors and out performance. “But a study
by economists Campbell Harvey, Yan Liu, and Heqing Zhu argue that many of these discoveries
are probably illusory. The sheer number of findings, the study argues, suggests researchers are
simply picking up a lot of random noise,” (Money, Dec. 2014, page 81) Discuss: What are they
saying?
Sharpe ratio for small caps. McDermott and D’Auria report beta for CRSP
6-10 (small caps) of 1.31 and a Sharpe ratio of 0.413. For the market (CRSP 1-10), they report a
Sharpe ratio of 0.419. Interpret. See the articles in the references. Go to moneychimp.com and
Search: Sharpe ratio. Use their formula to calculate Sharpe ratio for Flexsteel.
Seventy percent of Millennials say it is harder to achieve middle class. (Fox News,
6-11-15)
(Money, Aug. 2015) P/E Ratios for the S&P 500 are currently at 18.3, and the last
twelve months have ranged from about 18.4 to 17.3. Earnings were flat as the corporate outlook
slowed. Average Dividend Yields are at 2.03% of price. (Money, May 2015) Projected P/Es
indicate that stocks’ valuation remains frothy. See S&P data in Exercise #4.
The Russell 2000 Index of Small Cap Stocks had a total return for the last three years of
16.3%. Interpret. (Money, May 2015)
The average investor made about 2% per year in the last ten years, by mistiming the
market. The S&P 500 made about 9% a year. (Money, May 2015, p.54)
By inverting the P/E Ratio you can views shares of stocks as if they were bonds.
Short term investment with higher return? Guggenheim runs corporate bond ETFs
maturing annually from 2015 to 2024. If you buy one which matures in a few years, it might
make a higher yield short term investment. Also see “bank loan” funds. CDs pay about 1%.
See bankrate.com. BlackRock’s iShares offers muni and corporate ETFs maturing yearly.
(Money, May 2015, p. 58)
Housing should take up no more than 28% of gross monthly income, housing plus other
debt, 36% or less. But, frugal people know how to spend much less and invest the rest. (Money
May 2015) See the article in this course “The Financial Story of Mr. and Mrs. Dick and Jane.”
Mutual fund charges of an extra 1% can cost you 33% of your accumulations over the
long term. Assumes 40 years. $10,000 invested, underlying 5% return, fund expenses 0.2%
versus 1.2%. Do the math. (Money, May 2015, p. 50)
Money, May 2015: The current bull market will end. It always does. Now in its
seventh year, this is nearly twice the length of the average and is the fourth oldest since 1900.
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Selling off causes a bear market. The last two bear markets were among the worst in history. See
moneychimp.com for the history of the S&P 500. Try 2000 to 2007. The 2000 to 2002 bear lost
56.8% and took a second dip of 49.1% but recovered. Mega bears have an average 26 months of
declines, and take 69 months to recover. The NASDAQ has just recently recovered its former
high from 15 years ago.
Why retirement costs money. Inflation will get you. You may live longer. Of 65-yearolds, 11% reach age 95. There are other reasons. Do the calculations. What was the long term
inflation rate? (Money, May 2015)
Cost of financial advice. A report issued by the Council of Economic Advisors found
that conflicted financial advice costs retirement investors an estimated $176 billion a year. Why
should students learn financial mathematics? (Money, May 2015, p. 33)
Fiduciary standards: Act solely on clients’ best interest, applies to registered investment
advisors. It does not apply to many other financial salesmen and advisors. Almost anyone can
claim to be a financial advisor, and certifications of various sorts are easy to buy. Many would
not know how to determine if the product was in the clients’ best interest. They only tell what
they are told.
Millionaires. There are now more than10 million millionaires in the US holding $1M or
more. The methods for determining a millionaire are crude. You know much better methods.
There are actually many more than reported. Most millionaires don’t live in “expensive”
housing, drive “expensive” cars. Most attribute their success from saving early and often, most
are risk conscious investors, and more than two-thirds stash 10% or more each year in
investments. They know about P/E Ratios and with current ratios at a level not seen since the
financial crisis and the dot-com bubble, and they are concerned about the market.
The median salaries for millionaires who are still employed is $200,000. Among highnet-worth baby boomers (working and retired), investment income represents 47% of total
income. For older retired millionaires, its 76%. (Money, Aug. 2015)
Dividend stocks. For $100,000 over 30 years, stocks with growing dividends grew the
money to $1.8 million, stocks with flat dividends $925,000, stocks with no dividends $222,000.
(Money, Aug. 2015). Calculate the average total return. You know how to check on dividend
stocks and dividend growth mutual funds.
Making a million dollars. With 3% raises each year, a 35-year-old earning $75,000 and
saving 10% will become a millionaire before age 65, with annual investment returns of 5%.
(Money Aug. 2015) Check the math. See the article “The Mathematics of Financial and Social
Responsibility” or “Varying Annuities at the Real Rate of Return”, in this course, for a future
value formula.
Scott Burns and future investment returns. He predicts that instead of the long term 8%,
the 60/40 portfolio will earn 6%. This reduces the 30-year survival rate of retirement funds from
94% to 77%. What withdrawal strategy is Scott referring to? Long term corporate growth will
be reduced. Explain corporate growth and check his calculations. (Denton Record Chronicle,
July 26, 2015)
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According to Money, Aug. 2015, “Given today’s stock valuations and low interest rates,
it would be safer to assume returns that are 1.5 to 4 percentage points lower than historical
averages. For a balanced 60% stock/ 40%bond portfolio, you are looking at returns closer to 5%
rather than the historic 8.6%.”
Free online long term financial planning calculator. See portfoliovisualizer.com. It does
“what-if” retirement portfolio calculations. Does Monte Carlo simulations, and many more.
Earnings, Growth, and Wide Moat. Market Vectors Morningstar Wide Moat ETF
(MOAT) tracks an index that focuses on the 150 or so companies that Morningstar analysts
believe have strong sustainable competitive advantages (wide moat), and are positioned to churn
out reliable Earnings and profitability Growth. How do you find such a stock? These are called
high quality stocks which lose less than the S&P 500 in bear markets. In 37 of the past 38 fiveyear rolling periods, this index has beaten the S&P 500. (Money, Aug. 2015)
Find (MOAT) on the internet. List some of its top holdings. Evaluate several in terms of
basics such as discount below Fair Value, an Earning growth model, or a Dividend growth
model. How did this ETF compare to the S&P 500 in the last year?
A recommended stock investment. Money (Dec. 2013, p. 53) reported that despite recent
gains in price, the following stock has strong fundamentals, and is likely to continue as
profitable: Corning (GLW), YTD Gains 39%; P/E 12, Earnings Growth 15%. Report research of
this stock for this prediction, including the fundamentals.
Opting to take a buyout or monthly payments. Example: The buyout is $240,000. For
age 65, the government formula says you are due $1500 a month for life. By investing the
$240,000 you would pay yourself $1213 a month (Morningstar) with 80% chance of money
lasting to age 90. (Money, Aug 2015, p. 36) Can you explain Morningstar’s figures? They
could buy and immediate annuity. For $100,000 they would get $500 a month for life (Money,
Aug. 2015, p. 39) Do your own calculations.
Inflation moving up from 2.1% to 3%? CPI-U is the inflation index for suburban
populations. In June 2015, it rose .3%, in May .4%, and April .3%. What average monthly
inflation rate for the next nine months is required for 3% inflation? What are some other
projections? To add more evidence from last year, hospital services rose 5.9%, car insurance
4.9%, and airfares 5.3%. (Scott Burns, Denton Record Chronicle, Aug. 3, 2015) There are
websites on the internet that track monthly inflation rates.
References:
When you need to look up a topic, go to moneychimp.com. Click Glossary at the bottom
of main page. Click on topics you want to read about. For example Click on Weighted Average
Cost of Capital (WACC). Enter a topic in Search at the top of main page. For calculators, click
Calculator at top of main page. For formulas and derivations, Click How Finance Works:
formulas for …, and then Click Next Page or More repeatedly.
You could also do a search on finance.yahoo.com. For more information on Income
Statements, go to AAII.com and Search: Income Statements. You will see a sample Income
Statement. You will learn what is in Revenue, Gross Income, Operating Income, Income Before
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Taxes, Net Income, and Earnings per Share. For a sample of Corporate Statements: Income
Statement, Cash Flow Statement, and Balance Sheet, see moneychimp.com. See
financeformulas.net.
Sharpe, William F., Gordon J. Alexander, Investments, Fourth Edition, Prentice-Hall.
McDermott, John B., Dana M. A’Auria, “How Much Small Cap Should Be in Your Portfolio?”
AAII Journal, July, 2014.
In this course:
“Annual Total Return Table for the S&P 500 Index of Stocks,” July 2013.
“Standard Deviation as a Measure of Risk for a Mutual Fund,” Summer 2011.
“Measures of Risk and Performance for Mutual Funds: Beta, Alpha, and Sharpe Ratio,” Sept.
2011.
“Covariance and Correlation in Finance,” June 2012.
“Evaluation of Investments: irr, mirr, AM, TR, and HM,” Oct. 2011.
“The S&P 500 Index of Stocks and Three Sigma Events,” Aug. 2014.
“Examining the Financial Mathematics in Moneychimp.com,” 2015
For a free course in financial mathematics, with emphasis on personal finance, for upper high
school and undergraduate college, see COMAP.com. Register and they will e-mail you a
password. Simply click on an article in the annotated bibliography, download it, and teach it.
Unit 1: The Basics of Mathematics of Finance, Unit 2: Managing Your Money, Unit 3: LongTerm Financial Planning, Unit 4: Investing in Bonds and Stocks, Unit 5: Investing in Real
Estate, Unit 6: Solving Financial Formulas for Interest Rate, For about thirteen more advance
or technical articles, see the UMAP Journal at COMAP. The last section is Additional Articles
on Financial Mathematics or Related to Personal Finance. In all, there are about ninety articles.