Dow Jones 8751.45 +150.07 12:00 pm PST, May 27, 2003  NASDAQ 1550.22 +40.13 For info, visit access.smallcapnetwork.com S & P 500 948.17 +14.95 To be removed, please click here Russell 2000 425.88 +7.48 VOLUME 03: ISSUE 25  Calculating Price Earnings Ratios. ThinkPath deal update. Given that markets were silent yesterday as barbecues and road trips were the order of the Memorial day weekend, I thought it might be useful over the next two articles to discuss a couple of oft and perhaps ill-used indicators for the initial valuation of stocks. Most indicators rely heavily on historical financial data. However, the data we have collected over the last few years reflects an economic scenario that basically sucks. And those ugly numbers may obscure some good, or improving situations. The price to earnings (or p/e) ratio and its more esoteric cousin, the price to earnings growth (or PEG ratio) are two cases in point. While most earnings growth has been weak or negative over the last three years, any ratios that show up as interesting would warrant investigation. But first, investors have to know how to calculate them. Understand that a discussion of ratios can never be definitive. Each company has different underlying factors that produce the constituent numbers. That said, the basics can't be repeated too often.  Doing the math The ratio of price to earnings ratio is calculated as just that. Take the current share price of a favored company and divide it by the latest annual earnings per share number. If a company earned 50 cents a share in fiscal (always use fiscal years-that is, the twelve months that the company considers its year) 2002 and the shares trade at 22 dollars, the price/earnings ratio is 44 times (22 divided by .50). If that same company had made $2 a share, the p/e would be 11 times (22 divided by 2). You aren't likely to find many p/e's below 10 times-other than perhaps stodgy, slow growth utility stocks. The p/e ratio's investment value is to give a quick, initial (albeit limited) snapshot of a company's worth as a potential investment opportunity. Not to add any confusion, oil and gas companies tend to use price to cash flow (pcf) ratios instead of p/e ratios. We'll cover that in a future piece. Simple to calculate, but be careful The p/e ratio's worth as an indicator is tough to quantify. The number for an individual company has to be compared against its peers, the company's own historical p/e and the price/earnings ratio for the appropriate market. The p/e has a component of emotion in it, as investors tend to make subjective decisions to pay up for a company -thereby driving up the p/e-- based on other factors, such as rumor, unrealistic expectations, etc. As well, while a low p/e may look enticing on first blush, it can indicate that the company has underlying problems which investors are unwilling to pay up for. While the calculation is easy, its application bears caution. Example: White Electronics (NASDAQ: WEDC) trades at roughly $8.50. The company reported fiscal 2002 earnings of 35 cents a share. Doing the math, the stocks p/e will be $8.50 divided by 35 cents, equaling 24 times. That means that investors think enough of the company and its prospects to pay 24 times fiscal 2002 earnings for the company. Is 24 times last year's earnings high or low? It may well be fine for WEDC depending on other fundamental factors, the tone of the market and investor psyche. To get a true read of a company's prospects, investors also have to look at potential future earnings. WEDC shares are projected --by analysts polled by First Call-- to earn 43 cents in fiscal 2003 and 56 cents in fiscal 2004. How do the analysts' know? They don't, really. They are projecting what they think the company could earn given what they know now using, hopefully, careful unbiased analysis. When one takes the current WEDC share price of $8.50 and divides those projected earnings into the price, the future p/e ratio drops to 20 times and 15 times respectively. Don't be fooled or foolish. While, in our example, 15 times earnings is a lot better than 24 times, more investigation should be employed. The projected earnings number can change frequently-up or down-in the ensuing period. Which brings me to probably the most important caveat: Any investor who relies solely on p/e ratios to make purchase and sales decisions --to the exclusion of all else-- is financially doomed. Equally, ignoring the ratio-remember the tech bubble? -may be just as foolhardy. No company can survive the long term if it doesn't make money-Ballard Power may be the exception, but I digress.  The p/e ratio is like looking at a picture of a snazzy sports car. It may look good, but before you lay out real dough, you need to know what is happening under the hood. Remember the Bricklin... Of course a low p/e is a good thing. But what happens if a company doesn't have one? That is, what if the 'earnings' are still losses and the p/e is negative? When looking at small or microcap stocks, this happens more often than not. The appraisal process then becomes one of valuing future prospects: considering markets for a product or service, financing, contracts and management positioning of the company-all of which should combine to demonstrate a practical plan to profitability. Start here The p/e ratio must be regarded as a starting point. To return to WEDC, while the future p/e looks compelling when compared to the overall p/e of 30-plus assigned to the collective stocks in the S&P 500, as with all companies, one has to dig deeper. This exercise is called due diligence. In the case of White, the fundamentals actually do look strong: the company has very low debt, lots of cash and is in an industry-electronic design-- that has excellent growth prospects.  But in the case of some other stocks, a favorable p/e may be based on one good contract, a flash-in-the-pan product or inflated prospects. Bet we could name a few dozen of those. Ballard Power lost $1.14 a share in fiscal 2002 and is projected to lose 97 cents and 90 cents in fiscal 2003 and fiscal 2004, respectively. Its technology may hold promise, but years of losses could stall it for several years to come.  Truly, a case of looking under its environmentally friendly hood. A p/e ratio, if a company has one, is a good thing. It means that at least there are earnings. It is even possible, in some cases, to rationalise a high p/e (resulting from low earnings and a high share price) if there are mitigating (read positive) factors that support it or at least suggest reasonable growth is attainable. Companies that may appear intriguing, but have limited products, increasing losses or a stalled or consistently negative p/e should give investors pause. Momentum can, as saw in the late 1990's, move earning-less stocks to dizzying heights. But that's the stuff of another article.  The p/e ratio, employed as one of several analytical tools can either green light a potential investment for further investigation or signal caution. Once the status of a company's p/e is established, an investor can then move on to the PEG ratio.  Stay tuned. Thoughts on p/e's? I guess so. Email them here: : editor@smallcapnetwork.com   ThinkPath secures new contract from existing client In a press release released today, Tuesday, ThinkPath (OTCBB: THTHF) announced a snappy $1.2 million contract with an existing major US defense client. 3D drafting work on the Stryker--an armored vehicle that saw action in Iraq--will begin immediately and completion is expected over the next six months. The positive releases and corporate restructuring we profiled last week for ThinkPath coupled with this new deal have moved the stock up smartly. The relentless pounding of the shares by sellers seems to have abated and the stock has traded north of 10 million shares daily for the last couple of weeks.  It seems apparent that investors are once again looking seriously at ThinkPath and this new deal is another plank in what is shaping up to be an interesting turnaround indeed. Over the last 6-8 months, the company has secured $10 million in new contracts, both from new and existing clients. Overhead has been carved substantially including a move to more practical corporate space and the executive team foregoing remuneration during the consolidation. As well, the major hurdle of the company attaining a cash flow positive status on an ongoing basis has been cleared and the improved fundamentals should move the company ahead in the quarters to come. Given the large number of shares outstanding, the current share price of around 1-cent has to be viewed as an opportunity. Although still firmly speculative, the company is putting the plans in place and securing contracts that will propel it forward.  Investors who are interested in a unique speculative situation that has a real business, global customers and significant revenues against a low market cap would be advised to have a serious look. The shares have doubled in value from their low earlier this year and with more cost cutting and contracts in the works, the future looks bright for both ThinkPath and its shareholders. Below is a copy of Thinkpath's press release in its entirety:   Thinkpath Wins Design Engineering Contract with Leading Defense Systems Supplier Tuesday May 27, 7:02 am ET  Agreement to generate $1.2 million over five months TORONTO--(BUSINESS WIRE)--May 27, 2003--Thinkpath Inc. (OTCBB: THTHF - News), a market leader in engineering knowledge management solutions, today announced a $1.2 million agreement with one of America's leading suppliers of sophisticated defense systems. Thinkpath has been contracted to provide 3D drafting services on the Stryker, an armored vehicle currently in heavy use in Iraq. "This new contract continues to build on Thinkpath's strong abilities and experience in the areas of transportation and defense," said Declan French, President and Chief Executive Officer, Thinkpath Inc. "With our ability to hit the ground running on design engineering projects like this, we're helping our contract partner launch an important project very quickly." The contract was awarded to Thinkpath's Detroit office. Work on the project will begin immediately. About Thinkpath Inc. Thinkpath (spell OTCBB: THTHF) is a global provider of technological solutions and services in engineering knowledge management including design, drafting, technical publishing, e-learning, technical training and staffing. Thinkpath enables corporations to reinvent themselves structurally; drive strategies of innovation, speed to market, globalization and focus in new and old ways. We are experts in the aerospace, automotive, manufacturing and health care industries. Headquartered in Toronto, Canada, Thinkpath has 330 employees in six offices across North America. Further information about the company, its services and products can be found at www.thinkpath.com. This press release contains certain forward-looking statements regarding Thinkpath Inc., its business prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause Thinkpath's actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by Thinkpath Inc. in this news release and other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect Thinkpath's business. Contact: Thinkpath Inc. Declan French, 905/460-3041 dfrench@thinkpath.com Source: Thinkpath Inc. D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. 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