Early one evening, I sat down to begin studying in earnest some stocks that I had been thinking of adding to my portfolio. I had gathered a mountain of information from the SEC Edgar Database on these companies. I had a stack of annual reports sitting next to me. Most importantly, I had my trusty TI-36 solar calculator ready to do the number-crunching.

I began dutifully to write, calculate, and evaluate my numbers. Price to Sales, Price to Earnings, Relative Strength, Revenues to Enterprise Value, Subscribers per share, EBITDA per share, Revenues per employee, Working ratio, Current ratio, Leverage ratio, Day Sales Turnover, Receivables Turnover, Apple Turnover, How-much-longer-until-retirement ratio... I felt my concentration wane and I began to grow glassy-eyed after a long day of work.

Just then in my moment of weakness, the nasty dyno-duo of Mo-Mental and The Whisper appeared floating above me. Ever so slyly they chanted, "You don't need these numbers. Go with your gut. You don't need these numbers. Go with your gut." I was still pondering the apple turnover and thought that following my gut might not be a bad idea.

"You don't need all this math! There is no one quantitative way to value a stock. It's all psychology! Go with what you feel. Look over those reports you have sitting there. Find the company with the coolest looking products and BUY!" They insisted. "We know you hate math. Just think, no more nights figuring out these stupid ratios. Our method doesn't require any work. You can throw your calculator away today and never again have to remember what your old algebra teacher taught you!"

I always hated math. My motto throughout my sophomore year was, "I'll never use this stuff in the real world!" Making that a self-fulfilling prophecy, and forgetting all that math, sure was tempting.

"Go ahead, circle file that calculator! Delete that spreadsheet! All you need are your feelings to run-and-gun with us!" Running and gunning sounded cool. I began to dream of dashing through the floor of the stock exchange like Michael Jordan, my tongue hanging out, yelling "BUY! SELL!" and slam-dunking those cool pieces of paper, while Marv Albert ran the play-by-play on CNBC. "Parlay for threeeeeee... Yes! Parlay for three thousand shares."

Just as my dream started to get really weird, a booming voice blew away The Whisper and his nasty pal. "YOU! WITH THE CALCULATOR!" It was Motley Fool. I jumped up and ran to the window, only to have to rub my eyes again. He was driving an old police car with a 10-foot loudspeaker sitting atop it, a la The Blues Brothers. "WAKE UP." That's all the Fool had to say. No explanation was needed. Suddenly those hallucinations induced by Mo-Mental and company looked that much more ridiculous. I went back to my desk to do the Fool ratio, otherwise known as the Price to Earnings Growth (PEG) ratio, for my selected stocks.

One stock I was examining, Math Learning Centers [Nasdaq: ADD], was currently trading at $25. The company has trailing earnings of $.75 (including the quarter most recently completed). The company's fiscal year ends on August 31. And the mean analysts' estimates for fiscal 1998 stood at $1.25.

What did I calculate Math's current Fool ratio to be?

1) .50

2) .67

3) .82

4) 1.15

3) .82 is the correct answer.

Let's walk through how we calculated this ratio.

In case you forgot:
-Current Price: $25
-Trailing Earnings: $.75
-FY98 Earnings: $1.25
-FY ends August 31.

First, we need to calculate the price-to-earnings ratio. This is done by dividing the current stock price by the trailing 12-month earnings per share. In our case, we would divide $25 by $.75, giving us a PE of 33.3.

We then need to figure out the annual growth rate. The company is growing earnings by $.50 ($1.25 minus $.75) over this time frame. Dividing $.50 by the trailing earnings of $.75 gives us earnings growth of 66.6%, or .67 (a wrong answer). If we were to divide 66.6% growth by the PE of 33.3, we would get .50 (another wrong answer). However, the 66.6% is the total growth and not the annual growth we are dealing with here.

Since the company's fiscal year ends on August 31, the analysts are estimating the company will have trailing 12-month returns of $1.25, six quarters (1.5 years) from now. Don't forget the difference between fiscal and calendar year. To annualize 66.6% growth over 1.5 years, you must crack out your scientific calculator and take the 1.5 root (the amount of time to the estimate in years) of 1.666 (the total growth multiple). If you don't know how or are too lazy to do this with an old-fashioned calculator, I highly recommend downloading the World Famous Fool Peg-u-lator from the Electronic Fool for free. Makes these calculations a snap. In any case, we get an annualized growth rate after chugging the numbers of exactly 40.6%.

Dividing the trailing PE of 33.3 by this growth rate of 40.6% gives us a Fool ratio of (drum roll please) .82. That wasn't so hard, was it? Don't let those math skills get rusty. They will come in handy!

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