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RS Weekly Update - Three Foolish Metrics, ATVI and DKS

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November 26, 2010 – Comments (1)

Dear Fools,

Not long ago I put out a few articles that focused on three metrics I look at when researching companies: return on equity, operating margin and free cash flow margin. This week I thought it would be worth taking a moment to glance back at why they are worth knowing.  

Return on equity is a key indicator of how profitable the business is as well as how well the company's assets and leverage (debt) are being managed. Earning $1 million in a given year on $5 million in shareholder's equity is better than earning $1 million on $20 million in shareholder's equity, and this is what return on equity tells us.

Operating margin takes into account the company's operating expenses and shows this in relation to the company’s revenues. This gives us a metric to see how much the company is spending to run the business. I mean let's face it, earning $1 million isn't going to mean much if it costs you $950,000 to do it; and this is where the operating margin can help us out.

Free cash flow margin is arguably more subjective as it depends on how one defines free cash flow. For consistency’s (and simplicity’s) sake in this case, we define free cash flow as cash from operations less capital expenditures, and the free cash flow margin is a comparison of the free cash flow the company is generating to its revenues. This helps give us an idea of what is left after all the bills have been paid.

So there you have it, three Foolish metrics that I like to look at when checking out a company for further research. These certainly aren’t the only three worth looking at, but I think they’re a good start and you can tell a lot about a company by looking at these over stretches of time. Try looking at them with your next stock idea. You may just find something that you didn’t know you were looking for.

Fool on!

Jason Moser (TMFJMo)

Activision Blizzard

Axl Rose, the notoriously sketchy frontman for Guns N’ Roses is suing the gaming goliath for $20 million, claiming that they went against their word when they used the song “Welcome to the Jungle” in the game Guitar Hero III. Further, Rose claims that the company guaranteed there would be no association in the game with his former bandmate Slash. And guess whose likeness is in the game? You guessed it: Slash.

What will come of this? Who knows? Dare I ask, “Who cares?” The oddest thing is that the game came out in 2007, so this suit is a little late, wouldn’t you say?  To be sure, $20 million isn’t chump change, but it’s a drop in the bucket for Activision, so it ain’t makin’ or breakin’ the company. Given they could probably settle this thing for a bottle of Jack and a carton of cigarettes, I say rock on!

Dick’s Sporting Goods

If you saw Roger Friedman’s article from a couple of weeks ago, then you know that Dicks Sporting Goods (NYSE: DKS) is on my watchlist. There is a lot to like about the company for sure; I just wish it were cheaper! Unfortunately earnings recently sending the stock straight up and it has yet to come back down. No worries though, patience is a valuable asset in this game. Patience and a well stocked watchlist.

A great example of the company’s wide reach and entrepreneurial spirit can be seen in their latest project. Dick’s is partnering up with the NHL and Reebok to open up a temporary store in Pittsburgh with the sole purpose of selling official merchandise for the 2011 NHL Winter Classic hockey matchup between the Penguins and Caps. The 5,000 square foot facility will be open until December 31 at which time they will consolidate the operation and move to a new location closer to the ice for the game on New Year’s Day.

Talk about opportunistic; man I love it! Dick’s knows that hockey is a religion in this part of the country and this game is a highlight of the season for many. They are taking advantage of a great situation and this store is going to be the place to get anything and everything associated with the event in the Pittsburgh area. I’ll be keeping an eye on the company as I’m sure this venture is going to score big time.

Straight from the Onion

Shaq is dangerous both on and off the court

1 Comments – Post Your Own

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