OPPapers.com

Price/Earning

Investing in athletic shoes with Mac, Aisha, and Reggie

Part 3: Understanding the price-to-earnings ratio
In Part 2, Aisha learned that a company’s capital structure refers to the way it finances itself and its growth. Reggie told her that one reason a company’s capital structure is important to investors is because it shows how much debt the company has. Now, Aisha wonders why the capital structure includes the number of shares that are "outstanding" for each company. Outstanding shares Reggie explains that an "outstanding" share of stock is a share that an investor owns. The number of shares a company has outstanding equals the number of shares that all investors in that company, put together, are holding. Aisha looks at the capital structure of Nike and Adidas and sees different amounts of shares outstanding. Nike recently had 505 million* shares outstanding—a lot more than Adidas’ 203 million shares outstanding. What outstanding shares mean to an investor Wait a minute, they thought, the price of Adidas stock is more than the price of Nike’s stock, and Nike has more than two times the number of shares in the stock markets as Adidas. How they should take these factors into account when trying to decide if they should invest in Nike or Adidas? “The number of shares a company has outstanding generally has little to do with whether a company’s stock is a good investment or not. Almost all publicly traded companies have millions of shares outstanding,” explains Reggie.

Mac’s research shows them that the price of a share of stock moves around a lot. So far during 2007, a share of Nike’s stock has sold for as much as $55.40 and as little as $37.46. A share of Adidas has sold for as much as $63.46 and as little as $46.39. That day, the market price for Nike was $54.72 per share and $62.44 per share for Adidas.

He adds that in general, just because the price of a share of a company’s stock is higher or lower than of one of its competitors, investors cannot...