This post will try to follow a very simple explanation of inflation and how it impacts you. I will try my best to explain it in a ELI5 (Explain Like I’m 5) format.
What is Inflation?
Inflation is the decline of buying power your money has. Buying power is referred to as purchasing power and this simply means that the exact same product or service will require more dollars in the future.
Here is a quick example looking at the price of coffee and milk. The graph below represents how much the average cost for a cup of coffee and a gallon of milk have changed since 1970.
US Inflation Calculator is a cool tool to see how inflation has changed. The chart below shows how inflation has changed over the past 10 years (2010-2020).
This means that if your rent was $1,000/mo, it is now $1,187/mo simply due to inflation. The issue is magnified when you look at your expenses across the board: healthcare, food, insurance, etc.
You need to maintain your purchasing power. And this is why we invest!
I know some people are afraid of investing and only save money but saving is not enough. Only saving deteriorates your purchasing power. Pre-pandemic, the best high yield savings accounts were around 2.25%. If you were in a traditional savings account it was around 0.10%. Below lists US inflation year by year from 2015-2019.
Traditional savings do not do any justice in maintaining your purchasing power while a high yield savings account (prior to COVID) was keeping up with/outpacing the rate of inflation. Also, those jobs that give 2-3% raises are just keeping up with inflation, it doesn’t give you any more purchasing power than you had before. Inflation really matters especially when you are looking at retirement and lose your primary source of income and trying to maintain your lifestyle.
TLDR: Saving is not enough, you need to invest your money to keep up with inflation and maintain (or even grow) your purchasing power.
Throughout the pandemic, I have been getting tons of questions from friends about stocks and whether company XYZ is a good investment. So I decided to make this quick guide for my non-finance people who are trying to figure out whether a company is sound financially.
This is for people who are interested in analyzing a company and not just YOLOing what’s trending on Twitter or r/wallstreetbets.
I will try to keep this as simple as possible so a few generalizations may be made. We will take a look at 5 key metrics that focus on the profitability and overall financial health of the company.
There are a ton of financial metrics and you can easily go down a rabbit hole but it ultimately comes down to what YOU think is most important for a company’s success. As you invest, you will begin to develop what a successful company looks like to you. If you’re interested in more ratios, WealthyEducation has a good list.
EARNINGS PER SHARE (EPS)
Earnings per share (stock) is very straightforward. It is the company’s profit divided by the amount of shares that are in the market. We use this measure to see if the company is profitable. If the EPS is negative, that means the company suffered a net loss.
The higher the Earnings per Share (EPS), the better.
Net Income (profit) = $10,000
Outstanding Shares = 2,000
EPS = $10,000 / 2,000 = $5.00
PRICE TO EARNINGS RATIO (P/E)
The price to earnings ratio is also another profitability measure. It divides the current stock price by the company’s EPS. If a company does not have a P/E ratio listed, then it does not produce a profit.
The P/E ratio indicates how much you are willing to pay for every $1 in earnings.
P/E ratio of 20 – you are willing to pay $20 for every $1 of profit
P/E ratio of 50 – you are willing to pay $50 for every $1 of profit
With that logic, it would make sense that a lower P/E ratio is better because you would make a $1 return with less money invested. A low P/E ratio can indicate that a company is undervalued and a high P/E ratio can indicate that a company is overvalued. A higher P/E ratio can also indicate that investors expect the company to perform better in the future for whatever reason.
Now you might be thinking, “I could just look at P/E ratios alone to make a decision”. That is not the case because P/E ratios do not take into account anticipated growth of the company or debt the company currently carries so take the P/E ratio with a grain of salt.
There is no hard rule for what constitutes a good P/E ratio. Some say under 20, some say under 50, I will let you do that research and make your own decision but it does help to research ratios compared to others in the industry.
I’d say a Price/Earnings (P/E) ratio lower than competitors is better.
Stock Price: $100
Price to Earnings Ratio = $100/$5 = $20
Before we get into the current ratio, we need to define “assets”, “liabilities”, and “liquidity”.
What are assets? An asset is something owned by the company that has value
What are liabilities? A liability is a debt owed by the company
Examples: Accounts Payable, Building Lease, Salaries Payable, Mortgages Payable
What is liquidity? Liquidity refers to how fast an asset can be bought or sold or turned into cash. It would be faster to sell an iPhone than it would be to sell a house. So an iPhone would be considered more liquid than a house. That is the general gist of liquidity. It is important because without cash, or the ability to obtain it quickly from your assets, you cannot continue to operate if there is a financial bump along the way.
The current ratio is a liquidity metric that shows a company’s ability to meet their short-term obligations (liabilities). Short-term typically refers to within 1 year. Generally, having a current ratio of over 1 is good because it means you have more current assets than current liabilities but, as always, it is good to compare the company to others in the industry.
The higher the Current Ratio, the better.
Current Assets = 15.0
Current Liabilities = 3.0
Current Ratio = 15.0 / 3.0 = 5.0
DEBT TO EQUITY RATIO (D/E)
D/E ratio is a leverage ratio. Leverage refers to using borrowed money for an asset. A mortgage loan would be considered leverage as it allows you to buy something you wouldn’t be able to afford in cash today but will be able to pay back over time. Businesses commonly use debt to fund business efforts.
Equity is the difference between assets and liabilities. Investoepdia has a good description of shareholder’s equity:
“Shareholders’ equity is the amount of money a company could return to shareholders if all its assets were converted to cash and all its debts were paid off.”
The D/E ratio divides all of the liabilities over the equity. It lets you know for each $1 of equity, this is how much debt you have.
The lower the Debt/Equity ratio, the better.
D/E ratio = 4.0 / 2.0 = 2.0
RETURN ON EQUITY (ROE)
ROE measures how effectively a company can generate profits with the money that’s invested. It takes net income divided by equity. There is no set rule for an ROE percentage but the higher the better. I personally look for companies with an ROE of around 15%+.
The higher the Return on Equity (ROE), the better.
Net Income: $10,000
ROE = $10,000 / $50,000 = 20%
EXAMPLE USING YAHOO FINANCE
You can use Yahoo Finance to find all of these metrics. I will use Walmart ($WMT) as an example. We only need 2 of the tabs on Yahoo Finance: Summary and Statistics.
On the summary page, you will find the PE Ratio and EPS. TTM means trailing 12 months which is updated on a quarterly basis.
Walmart is profitable
They earn $6.27 per share
Investors are willing to pay $24.02 for every dollar of earnings
Walmart is able to generate 22.90% on what the shareholders have invested
MRQ = Most recent quarter
Current Ratio is less than 1 which means they have more current liabilities than current assets. The preference is that this number is at least 1 or more.
Debt/Equity Ratio – at a first glance, it is hard to tell if this number is good or not. We will take a look at a competitor to compare: Target ($TGT). Target currently has a Debt/Equity Ratio of 133.23 which is higher than Walmart’s 86.51. This mean’s Walmart may be in a good spot for the industry average. Of course, we could look at more stocks like Costco or Kroger to get a better idea.
Walmart has a good handle on generating profits and ,after taking a look at a competitor, they have a good handle on their debt compared to industry.
From doing this quick search, you can get an idea of whether any company is strong financially or it’s a YOLO play. A lot of times, this leads to more questions/research which will help you learn more about the company and its business. Hope this helped teach you some new things and good luck on your trading journey!
For us newbies, we’re always curious about “What language or framework should I learn?” and we do all this research trying to find the right one for what we think we want to do. The truth is, you’ll more than likely have to learn multiple languages/frameworks over time so it doesn’t really matter. The most important thing is that you learn and understand programming concepts and work on your problem solving skills because that is transferable across all languages.
Once you learn one language, the learning curve for another language is significantly shorter because you’re just learning new syntax but you already have the concepts and methodology down. Personally, after learning Ruby for 6 months, it took me about 2-3 weeks to get comfortable with Python and work at the same proficiency as I was in Ruby (which took 6 months!)
You will feel overwhelmed
One of the biggest lessons I learned was to just focus. As you begin to code, you will soon learn that there is soooo much different tech out there. Front-end languages and frameworks, back-end languages and frameworks, working with databases, deploying your app, etc. It’s going to be a lot but it will start to make sense as you put the time in. You’ll be tempted to try all the new tech that you learn about. There are so many technologies out there, it’s impossible to keep up with everything. It’s also impossible to get really good at any of them, if you’re continuously moving to something new each month.
It helped me to outline a learning plan and stick to it. My initial goal was to learn Ruby on Rails development so everything I did was focused towards that goal. Identify the topics you will learn, list the resources you will use, and schedule a time to study them. You will be surprised how far you come along if you stick to your plan. It also helps to follow a course or curriculum to get you started as it will help keep you focused. I recommend following something like The Odin Project.
Don’t just code along with tutorials
All of us newbies fall into this trap. This is great if you’re getting familiar with a new topic but this doesn’t help you actually learn the material. One of the biggest surprises to me while learning to code, is how much time you actually spend trying to fix bugs. In doing side projects, most of my time is spent researching issues and you don’t get that experience from coding with tutorials when the answer is always right in front of you.
Ways to improve your skill after completing a tutorial:
•Try recreating the project without the tutorial guiding you. That tutorial that seemed straightforward will surprisingly become hard and present some challenges which will be good practice.
•Add new features to the tutorial that you just completed. For example, let’s say you just completed a tic-tac-toe tutorial that 2 users can play.
You could add the following features:
-play against the computer
-add a scoreboard to count wins
-add the ability to save and reload the game
The point is to make the tutorial better on your own. This will further develop your creativity, problem solving, and Googling skills.
Build on your own
The real learning takes place in building applications on your own. This could be building apps from scratch or adding new features to the tutorials you already completed. Both present their own challenges but give you great experience.
Don’t worry if the project takes you longer than you expected (because it definitely will), just focus on getting it done. Ideas you thought were simple, may prove to be harder to implement but that’s part of the journey. You may feel stuck but you are progressing with each problem that you solve along the way.
Find a community
Learning is always more fun when you are doing it with others. You will quickly see that other people are having the same struggles as you and no, not everyone is an expert programmer who understands everything immediately. There’s plenty of Facebook,Discord, Slack groups to join for just about any tech. Pick a community and try to be active so you get the most out of it.
Having a community for motivation and answering questions is integral to your success, especially as a self-taught developer. Don’t be afraid to ask questions BUT make sure you do thorough research before asking a question
Twitter is full of great/encouraging people to follow.
Definitely use the hashtags #100DaysOfCode #CodeNewbie and you will be able to interact with people in all stages in their code journey.