Andrew Allentuck

Monday, January 28, 2002

Magic Numbers: The 33 Key Ratios that Every Investor Should Know
by Peter Temple
John Wiley & Sons, 2002
ISBN 0-471-47924-1.

Investment analysis is the process of working what is usually precious little information into a decision on committing money to an unknown future. In this excellent book, Peter Temple, an investment analyst turned author, goes into the basics of testing stocks by ratios of price to earnings per share (p/e), PEG ratio (that p/e divided by earnings growth rate), enterprise value over cash flow, price to cash, the burn rate of capital and so forth.

In each brief chapter, Mr. Temple defines the term, reveals the formula, explains, it, tells where to find the data, shows how to calculate the number and discusses its significance. This kind of data is available in many textbooks on investment management, but Mr. Temple has a gift for simplification. The downside of this is that potentially controversial measures get short shrift. For example, in explaining earnings per share, he alludes to problems of dilution when firms issue stock or have to pony up on stock options. He does not talk about the ability of accountants to turn losses into gains (think Enron here).

Magic Numbers will help the average investor to be a better investor. For the price,this is a precious reference work and even a good armchair read. A little oversimplification aside, it's a book almost any investor can read with profit.