My co-op experience of 28 months has been truly a learning experience in the Saudi Telecom company located in Saudi Arabia. Since our main field of study was financed, we did research on the Saudi chambers of commerce, its activities, scope and the financial evaluation of Saudi Telecom Company.
A chamber of commerce is a type of commercial organization whose primary objective is to develop business interests and work for the business community.
KSA presently has roughly 25 Chambers of Commerce like the Council of Saudi Arabia, Chambers of Commerce, Abha Chamber of Commerce and Industry,
Al- Ahsa Chamber of Commerce and industry etc. The Council of Saudi Chamber of Commerce is the spokesperson of the 25 Chamber of Commerce. The main objective of the Council of Saudi Chambers of Commerce is to work for the universal benefit of the Saudi chambers and represent these twenty-five chambers at both local as well as international levels. The primary role is to assist in the development of private sector industries and find suitable investment opportunities for private sector industries. The main objective of the council is to protect and develop the business sector in Saudi Arabia. Saudi chambers of commerce prepare regulations and rules and frames policies for the development of the business sector in Saudi Arabia. Its objective is to augment the involvement of the business sector in the financial and public development of Saudi Arabia.
The Saudi chamber of commerce is focused on the active participation of the Saudi nationals in the industrial development of Saudi Arabia. The chamber is making a mandatory effort in improving the investment opportunities for the private sector industries and in developing economic relations outside Saudi Arabia. The Saudi chambers of commerce are under the strict eye of The Ministry of Commerce (Shoult 34). The ministry reviews the financial reports and annual budgets of the Saudi chambers of commerce.
Reports indicate that there has been an increase in the annual profits because of the growth of fresh and transformed memberships. Saudi chambers of commerce are promoting its national products in international exhibitions in order to create a market for Saudi products. The Saudi chamber of commerce provides a boost for the development of private sector industries following the rules and regulations of Saudi Arabia. Tadawul stock exchange is the implementation of relationships provided in the country in terms of the Saudi Arabian stock exchange.
Saudi telecom company (STC) is a Saudi Arabian telecom company that offers to customers mobile, landline telecom services and internet service. For my internship in Saudi Telecom Company, the senior management people provided me with ample support to complete my task regarding the evaluation of the Saudi Telecom Company particularly the finance management. To begin with, I started by finding the mission and vision of the company, an overview of its features, its vendor management theories, its customer relation principles, etc. I started analyzing the company’s corporate governance theories and the annual financial reports of previous years.
Saudi Telecom Company (STC) has implemented several very difficult tasks which aim to renovate its trade from the typical government management to a more standard commercial business venture. The company has performed significantly well in the field of finance and its financial results are quite sound. The accounting principles which the company followed were explained and I started finding out the investment principles and the methods of investment that the company has been practicing. I was asked to investigate if the investment principles were accurate and whether the investment in Binariang GSM and PT Natrindo Telepon Seluler were impressive.
It was understood that The Company plans to generate 10 % of its revenues through investing in overseas markets. STC had a monopoly market in the telecom sector of Saudi Arabia for many years until the new telecom company Etisalat started its operations in 2005. I was asked to provide solutions as to how the stock price of the company could be maximized. Such accounting statements as the profit & loss statement at their value to the market share and the stock price are balanced in terms of evaluation getting closer to the cash flow and statements of funding. I collected the financial statements of the last three financial years for the purpose of evaluation and for determining the company’s ability to provide dividends.
Then I learned about the ability of the STC to meet short-term obligations by determining through the calculation of the current ratios. I estimated the values of current assets and liabilities for undertaking ratio analysis I started understanding how the profits and losses should be matched by taking into account the current economic conditions. I also started understanding the volatility of investments in the financial markets. I also acquired the knowledge of how to float tenders and how to select the most favorable quotation.
The Saudi Telecom Company has been generating high profits even when it faced competition from other telecom companies and is on the way to creating its own market share. The coop experience that the company provided me was very adequate in understanding the Saudi Telecom Company and the Saudi Chamber of Commerce.
Saudi Telecom Company (STC) offers various telecom services to the people of Saudi Arabia. Saudi Telecom Company is the reigning operator in the telecom industry in the kingdom of Saudi Arabia and is the largest provider of wireless and wireline networks in the gulf region. The Saudi Telecom Company (STC) represents a specter of services aimed at customers, such as mobile, landline and internet connection (Saudi Telecom Company). It is the largest telecom operator among the Middle East telecom service providers.
STC offers its customers a high level of satisfaction and considers its customers highly valuable. The STC network acts as a replica of the state’s ability for this century’s communication and information systems. The high quality of service that the STC offers to its customers makes it the best telecom company in Saudi Arabia. Customer’s requirements are given first preference in the STC which is a joint-stock company. The telecommunication services in Saudi Arabia are controlled by the STC. “STC was formed as a major holding company with a starting capital of over SR 12 billion and with the aim that it will eventually consist of several subsidiaries.” (Shoult 77).
The government of Saudi Arabia during the privatization process passed the power of controlling authority of telecommunication services to STC. (Doing business with Saudi Arabia edited by Anthony Shoult pg – 77, Telecommunications…..). The company was established in 1998 and was segregated from the ministry of postal and telephone services. When established, STC had a monopoly market in both the landline segments and the mobile segments but it lost its monopoly in the mobile service when the UAE-based Etisalat launched its operations in Saudi Arabia. ( The report: Emerging Saudi Arabia by Oxford Business Group, pg- 78, 2nd para ).
STC strives to improve the quality of service provided to the customers. STC plans to expand its business according to the commercial business standards because there is high competition in the telecom sector with STC losing its monopoly in the mobile segment. STC’s main profit revenues come from the wireless services that it provides to its customers. STC functions only in the kingdom of Saudi Arabia but it is the biggest telecom operator in the Middle East. The mobile segment of the company is known as Al-Jawal and has a huge customer base of around 14 million. The STC devises attractive telecom offers according to the requirements of the customers.
The STC is a giant employment provider and employs around 25000 people. STC is also focused to augment its value-added services by inventing new technologies. It is incorporating the 3.5G platform in its mobile segment in order to be in line with the global technology advancement. STC has made arrangements for the ADSL connection which provides speedy internet service to the customers. STC is in a financially strong position with a very strong balance sheet and its cash situation indicates that it can provide high dividends. (The report: Emerging Saudi Arabia by Oxford Business Group, pg- 78, end para).
In 2008 the Saudi government removed the monopoly status of the STC in the landline segment also. This was a blow to STC and STC has started feeling the competition fever. The STC has started improving its standard by providing improved service to its customers. STC has realized the importance of venturing outside Saudi Arabia in the wake of competition from other telecom operators and is in the process of acquiring licenses outside the kingdom. It is also in the process of dropping its operational and capital expenses. STC has also brought a change in its strategy by streamlining its business units into focused separate market units and has classified business units like individual cellular phones, organization business units, residence business units, and comprehensive business units. (The report: Saudi Arabia 2008 by Oxford Business Group, pg-142, Showing enterprise……) STC is making huge investments in the broadband internet connection network.
Financial analysis is used to predict the company’s growth and sale and the investor relations in the firm. The financial results of the company show the market presence of the company and its market share. It is the financial analysis of the firm STC which projects whether it would be able to survive the competition posed by its rivals in the telecom sector. Previously STC used to have a monopoly market in the telecom sector but the arrival of other telecom operators like the UAE based Etisalat and Kuwait based MTC has affected the sales of STC and this has reflected in the STC’s financial reports for the year 2009 compared to the previous yr, 2008.
The company STC has announced the financial results for the Yr, 2009. STC has earned high profits during the financial year 2008 because of which the company has received several awards. “The Company has recently achieved several successes and accomplishments, of which the most significant are: Won “Transparency Award for Saudi Stock Companies” for the year 2008- granted by BMG Financial Consultations Firm.” (Overview).
Regression analysis method
Regression analysis can be helpful for the estimation of the outcomes that arise from dependent variables and explanatory variables. This regression analysis otherwise can be termed as a statistical forecasting model. The given examples represent the variables at their significance to each other and other parameters of the analysis. They are intersected into dependent and independent variables.
Coming to the specific case of STC, according to DCF Analysis, the “Equity Risk Premium” of this company is 6%, the risk-free rate is 4.76% (Saudi Telecom Company 2).
The STC has investments in various companies. In some companies, it has full consolidation while in some others it has proportionate consolidation. In the kingdom itself, STC has invested in 100% ownership of Arabian Internet and Communication Services Company. It has investments in other countries also like Bahrain, Kuwait, Indonesia, etc. The accounting policies adopted are in accordance with the kingdom’s rules and regulations. The accounting year for this Joint-stock Company starts from January 1 and ends on December 31. The financial recession and the competition from new telecom companies have affected the profits of STC. The revenue profit has been calculated after discounts and by applying the rate that is prescribed by the Communications and information technology commission.
Financial ratios are calculated in order to evaluate financial statements minutely.
The ratio of STC at the moment can be attained by separating assets in accordance with their liabilities at the time.
It should be checked whether the current ratio of the firm is less than the industry average. With a faster rise of current liabilities over current assets a downfall observed in the analyzed ratio takes place. If a firm’s current ratio is below the industry average ratio then it indicates that the liquidity position of the company is weak.
Current ratio = current assets / current liabilities
Current ratio = 22,663,161 / 29,340,669 = 0.77 (Saudi Telecom Company).
The current ratio in the financial year 2008 was 0.82 times which shows that the company’s liquidity position in 2009 is weaker from the year 2008. In the current liabilities, the borrowings are very high compared to the previous yr. 2008.
The basic earning power ratio of STC is calculated by dividing the net income before deducting interest and taxes by the total assets of the firm (Saudi Telecom Company).
Basic earning power ratio = Net income before interest and tax / total assets
Basic earning power ratio = 12,130,368 / 109,587,476
Basic earning power ratio = 0.11 (Little 37).
The basic earning power ratio of the firm shows the earning power of the firm before the influence of interest and taxes. This ratio is useful for judging against firms that have different tax policies and dissimilar quantities of financial leverage.
Originally, the regression analysis of the financial data is represented in the regression table in an excel file. The regression stats analysis is the following:
Originally, R Square is one of the most important coefficients for the entire analysis. If the value of this is 0.8 and higher, the forecast is favorable. Data analysis of the Saudi Telecom Company is 0.78, which means that the regression is positive, and the company is losing its position in the financial market.
Beta analysis, in general, depends on the rate of return values and is calculated in accordance with the following formula
Thus, the β will be 4,33, as the Cov and Var are based on the following data
|Rate of return Asset||17,47||25,93|
|Rate of return Portfolio||33,49||11,06|
The total shareholders’ equity in 2009 is SR 42,034,825 and after deducting the minority interest of SR 8798 the total equity comes to SR 50,832. The operating revenue has increased from 42,469,368 in 2008 to 50,780,087 in 2009 but the operating income has decreased from the previous year by a huge margin of 2,521,554. The account receivable of SR 11,461,225 is shown at its net realizable value and includes billings as well as unbilled revenues. There has been a decrease in the cash and cash equivalents in the current financial year 2009 as compared to the previous year 2008. The net income of the STC has reduced from the previous financial yr. 2008 by SR 174,490. The net cash flow from operating activities has decreased from 21,148,946 in 2008 to 15,955,781 in 2009 which is not a good sign for STC.
The basic earnings per share on the operating income has reduced from the previous year while the basic earnings per share on the net income has minutely increased from the previous yr. 2008. “Saudi Telecom Company is the sole entity engaged in the provision of telecommunications services in the Kingdom of Saudi Arabia. The Company provides a range of telecommunications services including fixed local, national and international telephone services.” (Soudi Telecom). This company was established by the Royal Decree during the year 1998. The paid-up capital of this company is 20,000,000,000 in equity shares of SR 10 each regarding STC, it is seen that three years ago, the share prices were 66.75, a year ago this was 43.30 and as of now it is 47.30. (7010 Soudi Telecom). Thus, a 52-week change has been a positive of 9.24, and thus it could be seen that when compared to the earlier year, the share prices are on the increase.
Coming to the financials of this company, the major figures could be seen as follows:
(Soudi Stock Exchange).
It is now necessary to consider each of these items individually to have a clear idea about the financial performance of this company.
- Dividend per Share : DPS: It is seen that this has fallen over the years from 5 in 2007 to 3.01 in 2009, thus registering a fall of nearly 40% over just 2 years. Some of the main reasons for this could be the worldwide recession that has affected the communication sector and also more competitive elements in business.
- The Earnings per share, (EPS) ratio is considered to be the most critical component in determining a share’s price. It is also a major constituent for determining the price-to-earnings valuation ratio (Ken 55). In the case of this company, it is evident that EPS has been gradually slipping over the years, from 6.01 in 2007 to 5.43 in 2009, thus registering a reduction of nearly 10% over 3 years. A fall in profitability has resulted in lowered EPS.
- Coming to the current ratio that is the ratio of current assets over current liabilities, this has also come down by nearly 5% during the period under review.
- The leverage of any business is indicative of the ratio of equity funds with debt funds, in that a higher leverage means there is more of debt being used in the business as compared to its own equity capital. “Total debt includes both current liabilities and long-term debt. Creditors prefer low debt ratios because the lower the ratio, the greater the cushion against creditors’ losses in the event of liquidation.” ( P. 82: Chapter 3:Analysis of Financial Statements: Financial Management Theory and Practice: Eugene F. Brigham and Michael C. Ehrhardt)
- Price-Earnings of the business is a major barometer of its performance. It is seen that PE has fallen from13.93 during 2007 to 8.12 in 2009, a fall of nearly 42% in a couple of years. “The P/E gives you an idea of what the market is willing to pay for the company’s earnings. The higher the P/E the more the market is willing to pay for the company’s earnings. (Little).
- The next ratio is the Market price/book value ratio. There are schools of investors who look beyond earnings, growth, profits, etc. This Price Book ratio or P/B looks at the value the market pegs on the book value of shares. Normally the lower the P/B the better performance of the business. P/B = Share Price / Book Value per Share. It is seen that the P/B of this company has come down from 4.67 to 1.64, which may augur well for the shareholders.
- By far the RoE is the best indicator of the growth of the business. The RoE measures the net income available to common equity shareholders as a percentage of equity capital. Over the years it is seen that in the case of STC this has come down from 33.49% during 2007 to 21.37 during 2009, a fall of nearly 36% in 2 fiscals. Thus, it is seen that the management of STC could not bear the brunt of lower profitability and was constrained to pass it on to the shareholders in the form of lowered dividend payouts. Moreover, it is seen that with lowered profits and its impacts on business, perhaps equity shareholders are the most sufferers.
- Returns on total assets (RTA) have reduced from 17% to 10% during the year under review, indicating lowered performance by assets. Even with additional investments in assets, it is indeed pathetic to note the slump in earnings vis-à-vis assets. Net Income has come down from SR11m in 2008 to 10.8m in 2009.
- In the case of STC, due to reduced profits over the years, it is evidenced that their RoE has also taken a beating, falling by 23% in 2007-8, and again by around 18% during 2008/09. Since RoE is a major indicator of the economic health of the business, it is believed that it is necessary for STC to be able to improve upon their RoE through increased productivity and lowered costs. Moreover, it is palpable that STC enjoys both different kinds of strengths and challenges in its day-to-day operations and both short and long-term goal settings.
- The first aspect that needs to be considered is that of Paid-up Share Capital, which, in the context of STC is seen to be 2000million equity shares of SR 10 each fully paid up. Nearly 70% of this share capital is owned by the Saudi Arabian Government.
- The major impacts on revenues are Salaries and wages which are around SR 4.4m, Commission on sales which is SR 4.7m, advertising and publicity which are around SR 2.2 m. (Consolidated financial statements for the year ended December 31, 2009).
Regression analysis allows for the prediction of outcomes. Given two variables, it is possible to predict score of one (Y) from the other (X) if their linear relationship (i.e., the correlation between the variables).is known. Thus, it is now necessary to establish a correlative analysis between profitability and risks. There are major concerns about the outcome of this regression analysis, considering the present scenario.
If the common stockholders were the only investors then the cost of capital used in capital budgeting would be seen as the required rate of return on equity. (RoE). However, this is not always the case, and often different types of capital, equity, preferential, debentures, etc are needed.
It is believed that the required rate of return on each capital component is called its component cost and CoC used to analyze capital budgeting decisions is the WACC, Coming to the case of STM, it is seen that this company has only one type of capital that is 2000 million fully paid shares at par value of SR 10 each amounting to SR 20,000m
Thus, the WACC, in this case, would be the cost of capital of these equity offerings to the public, out of which 70% has been held by the Government of KSA.
Besides the above, there are also impacts of risks like current, credit, debtor recoveries and liquidity risks. Coming to the first, that is current risks, it is seen that the current ratios of the company could be seen as follows: For fiscal 2008 the current ratio was 0.82 but in fiscal 2009, this has lowered to 0.77, reduced by 6 percentage points. With average industry liquidity around 4%, there is indeed cause for concern for STC’s liquidity.
Again, coming to debtors as a portion of total assets, during 2008, this has constituted 8% of total assets, but this has marginally increased to 10% during fiscal 2009. Coming to days outstanding for both debtors and creditors of STC for fiscal 2008 and 2009, it could be said as follows: The debtors’ realization period has increased from 62 days during 2008 to 82 days in 2009, adding an additional period of 20 days, which does reflect adversely on its debt management and collection mechanism during the year under review. When comparing the performance of STC with industry the following patterns emerge.
While the price-earnings ratio at 8 is a healthy barometric indicator, the other parameters like price/sale, price book, price cash flow, etc. fall short of industry expectations. Therefore, it becomes necessary for the company’s management to address these issues suitably in order to reach good solutions.
According to the Annual Financial Statements of STC for fiscals 2009, there are long outstanding debts since inception which are valued at SR 101 million (2008: SR 115 million), with an annual average of SR 189 million for the ten years preceding 2009. These impact the balance sheet also and the length and quantum of their collectability are also uncertain and could be treated as continent assets for balance sheet purposes. There are also several risk factors that impact the business of Saudi Telecom.
These can be seen in terms of currency risks which have severely impacted the company’s performance during 1Q’10. “The net profits in Q1 dipped to 2.49 billion riyals ($664 million) compared with 3.03 billion riyals in the Q1′08. “The decrease in the first-quarter net profit is due to currency differentials on the company’s investments abroad … The impact of the fluctuation in the exchange of currencies is estimated at 686 million riyals,” STC said.” (Foreign Currency Fluctuation Calls for 17.9% Drop in STC’s Q1’09 Profits (Saudi Arabia)).
How to make constructive strategies in the telecom business
Perhaps the main areas that STC now needs to look into are in gaining good returns from their investments, lowering operating costs and maximizing profits and shareholder values. For this, it is necessary to trim avoidable costs like advertising, commissions, and other non-productive expenses in business. Again, it is also necessary for a business to take care of employees and shareholders through a good working environment, attractive pay packages, and good returns for investors and shareholders.
The risks in terms of currency need to be hedged adequately through currency hedging methods. “Hedging is done by a firm or individual to protect against a price change that would otherwise negatively affect profits. For illustration purposes, adverse currency fluctuations could hurt the bottom line of business but through judicious and planned hedging this could be circumvented and changed into opportunities and benefits that have long-term business prospects and interests. Perhaps one of the most effective countermeasures against extreme currency fluctuations could be derivative protection for STC.
This is more pronounced in the case of currency fluctuations that occur during economic recessions and whose impact could be more severe than under ordinary economic circumstances. There are many aspects that impact a government-controlled company like STC, including political and socio-economic factors, fluctuating energy prices, and STC’s role in the regional GCC arena. Besides, telecommunication in the global arena has registered major growth and expansion thrusts in leaps and bounds and STC, for one should not be left behind in this race for supremacy in the GCC and world telecom markets.
Emerging economies like India, China and Russia, to name a few have made stupendous progress in the telecom markets, providing the much-vaulted broadband connectivity in even remotest places and ushering in high technology into their industrial sectors. With the world fast moving into a digital age, STC needs to serve as a role model not only for the progressive-minded Saudi but also for constituents of the Gulf Co-operative Council (GCC). Besides, there is more than growth and profitability at stake for STC.
Competitive elements and competing services provided by STC
Saudi plays a pre-eminent and patriarchal role among oil-rich GCC member countries, given the fact that it has the largest known deposits of crude oil in the world. This being so, its role and responsibilities to harness its neighbors for economic growth and self-sustenance are imperative. Coming to the competitive elements that influence STC’s business it is believed that its major competitors are:
- Etisalat- UAE- Emirates Telecommunications Corporation, headquartered in Abu Dhabi, UAE
- Oramsun Telecom Holdings, premised at SAR- Cairo, Egypt and
- Qatar Telecom (Qtel) QSC- based in Qatar, Doha
The main services provided by STC are in the areas of Wire-free network operations, provision of data services, provision of internet and online services, fixed-line voice service provision and local and long-distance telecommunication carrying services. In addition, STC also provides fixed, moving, domestic and international along with Internet and other data services to uptown and commercial customers. Saudi Net and AwalNet provide internet and supply telecommunication facilities while Tejari Saudi Arabia gives e-commerce services to internet user clients.
This company also has an underwater cable system linking KSA with Sudan managed by its subsidiary company. Customers provide the demand and business requirements for data. The development of individual companies varies on efficient practices and better marketing. Large scales ISPs have economies of scale in business, especially in procurement and promotion. Smaller companies could match productively by operating in underdeveloped markets or making good marketing services. Thus, it could be visualized that a large public company like STC could deliver excellent services and business growth to its customers through achieving economies of scale in all major areas of public accountability, including endorsing, marketing, financial and costing and revenue generation in a large global market.
At present, Saudi Telecom serves around 20m customers in its mobile segment while around 4m are catered through its landline services. Of late there have been many complaints of poor servicing including wrong billings which has resulted in switchovers from STC to other private service providers in the KSA.
Investment patterns in STC
The majority of shareholdings of this company vest with the Saudi Government. Besides the General Organization for Social Insurance and public pension funds, the wings of the Government also hold 5% apiece, while the public has just 20% stakes. Thus, basically, STC is a Saudi government enterprise with little public stakes, and this underlines the importance the government attaches to this strategic element of business in the telecom sector in the kingdom. Besides, STC also has several subsidiaries and stakes in many other telecom companies around the globe which is shown as below:
|Serial||Company||Country of origin||Stakes|
|2.||Tejari Saudi Arabia||KSA||50%|
|3.||Arab Submarine Cable Co.||KSA||45.7%|
It is necessary that the above investments plus the potential investments to be made by STC in the future need to be beneficial to the long-term growth and development of its core business and shall facilitate its operations in the future. Investments in core telecom business would be to reach out for strategic partnerships and alliances which are very much important in the present-day competitive business of telecom at an international level. Besides, strategic alliances and partnerships do foster mutual advantages for both parties and do lower the high-risk levels of competition and rivalry in this business. The role of telecommunication in the defense and internal security of most countries is well known, especially in the present-day fragile scenario of peace and security in the world, this takes on added dimensions.
Is the share value of STC overvalued?
There are no reasons to believe that the share value of STC is overvalued. On the contrary, it is witnessed that it is being undervalued over the last few years of its operations. Both its Price Earnings ratio and Market price to book value have reduced dramatically in recent years. As a matter of fact, the PE Ratio has come down from 13.93 in 2007 to 8.12 in 2009. Again, coming to the P/B ratio, it has reduced from 4.67 in 2007 to 1.74 in 2009.
STC is a large public limited company engaged in telecommunication business not only in KSA but also in other parts of the world through contractual commitments. Besides, it has strategic interests and stakes in major telecommunication projects in many parts of the world. Perhaps as a direct result of this, it has also to bear the brunt of reverse swings of recession and low demands for its products and services on a global level. Besides it has robust competitors, both within the GCC and outside who could outbid it in many lucrative projects.
Therefore, it would be best for STC to concentrate on projects at home and neighboring countries wherein the risk elements are known and could be effectively countered. Besides, major risks like currency fluctuations, geopolitical influences, funding and cultural differences that impact business, may be less felt. There are strong needs for STC to improve its financials and upgrade its strengths in all major areas of public and shareholder accountability.
Towards achieving this aim, it needs to gear itself for meeting the new challenges that beset the telecom industry. Having been a dominant and experienced player for more than a decade, it would need to rise to the hour and deliver strong performances in the years to come. This may not be a difficult task, considering that STC has been a robust player who has been well entrenched in the business of telecom and over the years, has built up strong internal and external resources to counteract against the market and non-market competition in this field.
Besides, the field of telecom is fast evolving from one of mere use of gadgets to an entire new gamut of mass communication, extraterrestrial connections and a dynamic growth segment that could produce incredible advancement in the field in the time to come. STC needs to gear itself up both internally and externally, to meet the challenges and risks that would confront it in the future.
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Little, Ken. Understanding Price to Earnings Ratio. About.com: Stocks. 2010. Web.
Overview. STC. 2010. Web.
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