Stock valuation methods and applications

Stock Valuation

Scholastic Corporate (NASDAQ: SCHL) is an educational publishing firm based in the United States. In order to make an investment recommendation on this stock, a number of different techniques can be used to analyze its financial performance. These include ratio analysis, for which three ratios will be chosen, and trend analysis for the past three years. The stock is currently trading at $26.41, its lowest level since August of 2010, but substantially higher than its levels at the depths of the recession in early 2009. The company has a beta of 1.31, indicating that it is more volatile than the market in general. The three ratios that will be examined are the current ratio, which measures liquidity, the net margin, which measures profitability and the return on equity, which measures the ability of the firm to convert its equity into profit.

The current ratio for Scholastic is 2.27. This compares with 2.01 in 2009, 2.07 in 2008 and 2.21 in 2007. This is a very high number, which indicates high liquidity. The trend is that the current ratio dipped during the recession but has now recovered to pre-recession levels. The second ratio is the net margin. The net margin for Scholastic is 2.9%. The company lost money in each of the past two years -- net margins of -0.7% and -0.8% respectively and in 2007 the net margin was 3.2%. This shows a similar pattern where the company's performance declined during the recession but is now recovering to pre-recession levels. The final ratio is the return on equity. The ROE for Scholastic at the end of fiscal 2010 was 7.2%. This compared with -1.7% in 2009; -1.8% in 2008 and 5.7% in 2007. The same trend is in evidence here as with the previous two metrics. It is worth noting that the company's stock price also fits this trend, having tanked in late 2008 and early 2009, only to experience slow recovery back into the pre-recession range.

The trend analysis should support this. Revenues increased 3.4% in 2010; decreased 14.3% in 2009, increased 15.4% in 2008 and decreased 8.8% in 2007. In this span, gross profit increased 8.8% in 2010, decreased 13.3% in 2009, increased 11.7% in 2008 and decreased 4.8% in 2007. Because the net income slipped into a loss, the figures are going to be skewed, but the trend holds. It is also necessary to examine the trends in the firm's balance sheet. Total liabilities decreased 6.5% in 2010, decreased 7.3% in 2009, increased 18.6% in 2008 and decreased 25.3% in 2008. The book value of the firm's equity increased 5.7% in 2010, decreased 10.1% in 2009, decreased 18.2% in 2008 and increased 1.8% in 2007. This indicates that while the firm has done a good job of reducing its debt, the company has seen its equity decline in value. There was an increase in 2010, but not back to pre-recession levels. The company in general is about 22% smaller, with the equity value being 21% lower over the same time frame.