Key Facts
• The ‘Stock Trade’ series is popular among individual investors, teaching financial analysis.
• Author Masayuki Kubota has 25 years of fund management experience, overseeing over $2 billion.
• A quiz compares Company A (PER: 10x) and Company B (PER: 20x) for investment potential.
• Company B has a stronger revenue base with a 40% operating margin and 35% ordinary profit margin.
• Company A shows a 25% net profit margin due to one-time special gains, despite negative operating profits.
• Special gains/losses are excluded to assess true earning power.
• Adjusted PER for Company B drops to 5x, making it undervalued compared to its initial 20x.
• Company A’s adjusted PER is uncalculable due to negative ordinary profits.
Summary
The article highlights the importance of evaluating a company’s true earning power by excluding special gains and losses. While Company A initially appears cheaper with a PER of 10x, its negative operating and ordinary profits reveal a weak revenue base. In contrast, Company B, with a PER of 20x, demonstrates strong fundamentals, including a 40% operating margin. Adjusting for special items, Company B’s PER drops to 5x, making it a more attractive investment. The analysis underscores the need to focus on core profitability metrics for informed stock decisions.
