Investing in Your Employer's Stock

As an employee, you could simultaneously be in both the best and worst positions to analyze the financial prospects of the company you work for. Ideally, you're in the best position to know whether your products or services are selling well, whether or not you're reaching performance goals in terms of revenues and profits, and whether upper management has a strong vision for the future. If you can use this knowledge when evaluating your company's stock, it's likely that you'll a make good, fundamentally sound decision. On the other hand, it's not at all unusual for employees to lose their objectivity about their company as an investment alternative. Years of indoctrination about the quality of your company's products or its uncompromising level of service can diminish your ability to make impartial, arm's-length assessments. This could make deciding not to buy your employer's stock seem like a betrayal or lack of support rather than a purely financial decision.

When evaluating the merits of placing your hard-earned wages back into your organization, in addition to gauging your intuition for the direction of your company's financial future, it's imperative that you also analyze the facts and figures that are available to all investors. Additionally, you must keep in mind that the perceptions of the investing public are a major force in determining stock prices. You'll need to ask yourself – or a good investment advisor – several pertinent questions:

What are the industry's prospects as a whole? You should be aware of how changes in the economy affect the industry that your company is a part of. For example, some industries such as car manufacturers, home and commercial builders, and manufacturers of luxury items tend to have significantly larger profits during times of general economic expansion. Conversely, during periods in which the economy has slowed, defensive industries (those that produce products which are used regardless of economic activity or consumer income) typically continue to make money. Examples of these types of industries include food and beverage manufacturers and distributors, discount stores, and producers of home and personal products.

What's the revenue trend of my company? Check your company's annual report for last year's revenues. By studying the quarterly numbers and computing percentage changes from year to year, you can get a good idea of the direction and size of revenue growth. Be sure to compare the growth rates of at least the previous five years. You'll also want to see how your company's growth numbers stack up with those of other companies in the same industry.

What's the profit trend of my company? After all, profits are the name of the game. How much money is your company making, and is it profiting more each year? It's important to look at profits on a per-share basis; in other words, the company's earnings per share (EPS). The EPS is calculated by dividing the company's total net profit by the outstanding number of shares of common stock. Because each share of stock represents ownership in the company, the EPS is a valuation of the earning power of each shareholder's segment of ownership. It tells how much their shares of the company generated in profits. Evaluate the growth in your company's EPS just as you did its growth in revenues, looking at year-to-year trends and comparing current and long-term growth.

Once you've answered the above questions you should have a pretty good idea how well your company is performing. However, that still won't let you know whether the stock represents a good buy at its current price. The price-to-earnings ratio (which is the stock's price per share divided by its earnings per share) can help you there. This ratio, also known as the P/E, computes how much you have to pay for the company's earnings per share. So, all things being equal, a lower P/E is more desirable because you're paying less for each dollar of earnings. If you hear that a stock is selling 'at a discount to the market', it means that it has a lower P/E ratio than the general market. With this, therefore, being the case, why would anyone ever be willing to buy a stock with a high P/E ratio? That's simple: because they expect earnings to grow to the point where the price that they paid for the stock looks like a bargain.

When deciding on whether to invest in company stock, don't lose you head. The bottom line is this: if you choose to invest in the stock of your employer, ensure that your decision is based on sound investment fundamentals, not employee loyalty. You owe that to yourself.

blog comments powered by Disqus