Stock Market Background Check
Stock Market Background Check
Return on Equity: The ultimate measure of a stocks success. ROE shows you the rate of return to shareholders by dividing net income by total shareholders equity. Bigger is always better with this number because it means the company is making a lot of money off the investments that shareholders have made. A good return on equity is anything above 20%
Earnings per Share: This is the king of growth measures. EPS takes what a company earns and divided that by the number of stocks outstanding. It is the last thing listed on a companys income statement, known as the famous “bottom line”. Earnings per share tend to fall between $1 and $5, with the occasional spike to $10 or $20. When a company goes negative, it means they are losing money.
Price/Earnings Ratio: This is the king of value measures. It is the price of the stock divided by its earnings per share. Each company has a trailing P/E and a forward P/E. The trailing uses earnings from the last 12 months while the forward uses next years projected earnings from an analyst. A stocks price by itself is meaningless. The Billy Breed method of looking at stocks(seeing a low priced stock and buying it) does not make any sense. If one is selling for $100, and the other is selling for $20, which one should you buy? You do not know until you see the P/E ratio. Say the $100 stock earned $10 last year, and the $20 stock earned $1. The $100 stock has a P/E of 10, and the $20 has a P/E of 20. The $100 one is a better value because youre buying more earnings power with your money. The lower the P/E ratio, the better off you are.
Cash Flow per Share: Cash flow is the stream of cash through a business. You want it to be positive and youd love it to be big. Some companies dont however.( Buy now pay later: Boost profit without increasing cash flow. This ratio lets you see what price youre paying for a share of the companys cash flow. Cash flow per Share= companys cash flow/number of shares outstanding.
Current Ratio(working capital): It is a popular gauge of a companys ability to pay its short-term bills. The ratio reveals how easily a company can deal with surprising or unexpected circumstances (market crash is an extreme example). It is measured by comparing its current assets (things used up and replenished frequently like cash and inventory) and its current liabilities (everything it owes: loans and bills due within a year). Look for companies with a current ratio of at