Pre K
Grades 1-2
Grades 3-6
Grades 7-9
Kids Teens Parents
LOOKING FOR CLUES

Shareholders frequently ask: "How do the portfolio managers of mutual funds decide which stocks to buy?" The answer: homework - lots of it.

Different Strokes for Different Folks
When investors look at a stock, they can go through different processes to see if it might be a promising investment. Some portfolio managers use fundamental analysis to help decide if they should invest in a company. This means they study basic information about the company. They examine its balance sheet and income statement to get an idea of its financial strength. They also look at its earnings history and growth rate. It can also be helpful for them to talk to industry analysts about the company's management. Finally, they check out its products and market position. Portfolio managers are looking for clues about a company's long-term financial health that can help them make decisions about the company's growth potential.

Where to Look
One place to start the search for clues about a company's financial health is in its annual report. This document provides detailed information about the company's economic condition and what the company did in the previous 12 months. Two of the most helpful items in the annual report are the balance sheet and the income statement.

The balance sheet offers a "snapshot" of a company's financial health at a specific point in time. It reports all the company's assets (what it owns) and liabilities (what it owes), and shows how these have changed since the end of the previous year. This report is called a balance sheet because the asset side of the ledger must equal - or balance with - the liability side.

The balance sheet helps investors determine if the company has enough assets to pay both its short- and long-term bills. The balance sheet also shows the value of all the stock owned by shareholders. In addition, it shows the amount of profits that have been reinvested in the company.

Another important financial table found in annual reports is the income statement. The income statement adds up all income, subtracts expenses and shows how much money is left to reinvest in the company.


Show me the Clues!
A company's income statement and balance sheet can help you decide whether to invest in its stock. Here are some clues to look for:

Earnings per share (EPS). You can find EPS on the income statement. EPS shows you the company's profits per each share of common stock. A company's earnings-per-share information is used to determine a stock's price-to-earnings ratio. When portfolio managers look at a stock's EPS, they are examining how it changes from year to year. They like to see a stock's EPS growing at a steady rate.

Shareholders' equity. Using the balance sheet, subtract the company's total liabilities from its total assets. The amount left over is the total value of the shareholders' investment in the company. Shareholders' equity is used in finding the company's debt-to-equity ratio and its return on equity.

Debt-to-equity ratio. The balance sheet also can help you find this measure of a company's financial strength. You find this ratio by dividing the company's total liabilities by the total shareholders' equity. In general, the lower the ratio, the stronger the company.

Return on equity. You find this important measure of a company's ability to make a profit by using both the balance sheet and the income statement. Simply divide total shareholders' equity by the company's net income after taxes. Comparing this number from year to year reveals trends that can tell investors how well a company is using its investments.

In general, portfolio managers of mutual funds use these and other clues to help locate companies that they believe will be good investments for their particular fund. Usually, such companies have a high return on equity, a low debt-to-equity ratio and, hopefully, the ability to grow earnings each year. Of course, just because a company has these qualities doesn't mean it will continue to do well. But this information can help investors make knowledgeable decisions.



 
 
Please consider the objectives, risks, charges and expenses of any Columbia fund carefully before investing. Contact your financial advisor for a prospectus, which contains this and other important information about the fund. You should read it carefully before investing.