Security Analysis : Sixth Edition, Foreword by Warren Buffett: Additional Aspects of Security Analysis. Discrepencies Between Price and Value

reserves).
    29. Total current assets.
    30. Total current liabilities.
    30. N. Notes Payable (Including “Bank Loans” and “Bills Payable”)
    31. Net current assets.
    32. Ratio of current assets to current liabilities.
    33. Ratio of inventory to sales.
    34. Ratio of receivables to sales.
    35. Net tangible assets available for total capitalization.
    36. Cash-asset-value of common per share (deducting all prior obligations).
    37. Net-current-asset-value of common per share (deducting all prior obligations).
    38. Net-tangible-asset-value of common per share (deducting all prior obligations). (36 S.P., 37 S.P., 38 S.P.—Same data for speculative preferred issues, if wanted).
    H
. Supplementary data (when available):
    1. Physical output:
Number of units; receipts per unit; cost per unit; profit per unit; total capitalization per unit; common stock valuation per unit.
    2. Miscellaneous:
For example: number of stores operated; sales per store; profit per store; ore reserves; life of mine at current (or average) rate of production.
    Observations on the Industrial Comparison. Some remarks regarding the use of this suggested form may be helpful. The net earnings figure must be corrected for any known distortions or omissions, including adjustments for undistributed earnings or losses of subsidiaries. If it appears to be misleading and cannot be adequately corrected, it should not be used as a basis of comparisons. (Inferences drawn from unreliable figures must themselves be unreliable.) No attempt should bemade to subject the depreciation figures to exact comparisons; they are useful only in disclosing wide and obvious disparities in the rates used. The calculation of bond-interest-coverage is subject to the qualification discussed in Chap. 17, with respect to companies that may have important rental obligations equivalent to interest charges.
    Whereas the percentage earned on the market price of the common (item 18) is a leading figure in all comparisons, almost equal attention must be given to item 15, showing the percentage earned on total capitalization. These figures, together with items 7 and 19 (ratio of aggregate market value of common stock to sales and to capitalization), will indicate the part played by conservative or speculative capitalization structures among the companies compared. (The theory of capitalization structure was considered in Chap. 40.)
    As a matter of practical procedure it is not safe to rely upon the fact that the earnings ratio for the common stock (item 18) is higher than the average for the industry, unless the percentage earned on the total capitalization (item 15) is also higher. Furthermore, if the company with the poorer earnings exhibit shows much larger sales-per-dollar-of-common-stock (item 19), it may have better speculative possibilities in the event of general business improvement.
    The balance-sheet computations do not have primary significance unless they indicate either definite financial weakness or a substantial excess of current-asset-value over the market price. The division of importance as between the current results, the seven-year average and the trend is something entirely for the analyst’s judgment to decide. Naturally, he will have the more confidence in any suggested conclusion if it is confirmed on each of these counts.
    Example of the Use of Standard Forms. An example of the use of the standard form to reach a conclusion concerning comparative values should be of interest. A survey of the common stocks of the listed steel producers in July 1938 indicated that Continental Steel had made a better exhibit than the average, whereas Granite City Steel had shown much smaller earning power. The two companies operated to some extent in the same branches of the steel industry; they were very similar in size, and the price of their common stocks was identical. In the tabulation presented on page 666 we supply comparative figures for these two enterprises, omitting some of the items on our standard form as immaterial to this analysis.
    Comments on the Comparison
. The use of five-year average figures for each item, presented along with those of the most recent twelve months, is suggested here because the subnormal business conditions in the year ended June 30, 1938 made it inadvisable to lay too great emphasis on the results for this single period. Granite City reports on calendar-year basis, whereas Continental used both a June 30 and a December 31 fiscal year during