Stocks 505 – Understanding Key Statistics
Being able to understand what each key statistic means to a company and, whether it represents good value or not is essential to identifying great stocks. All fundamental analysis derives from the company’s financial statements. Here are the core financial metrics and how they are calculated:
• Market Capitalization – Also called Market Cap, is the total value of all the company’s outstanding shares and is used to evaluate its size in the market.
Market Cap = Number of Outstanding Shares X Current Share Price
• Price/Earnings (P/E) – A common metric used to measure a company’s value of earnings per share to its current share price.
P/E = Current Share Price / Earnings Per Share (EPS)
• Price/Earnings to Growth (PEG) – A ratio used to determine a company’s current value with regards to its earnings growth. The lower the ratio, the better the value may be.
PEG = P/E / Annual EPS Growth
• Price/Sales (P/S) – Using the current share price compared to the company’s revenue, provides a per dollar value for its sales. A good tool to compare a company’s sales to its competitors.
P/S = Current Share Price / Sales or Revenue Per Share
• Price/Book (P/B) – Used to measure a company’s market value to its book value. A lower ratio may mean a stock is undervalued.
P/B = Current Share Price / Book Value Per Share
• Operating Margin – The margin of a company’s revenue remaining after paying the costs of goods sold and production.
Operating Margin = Operating Income / Net Sales
• Profit Margin – The margin of income for a company after all expenses are paid. A key measure in determining a company’s profitability, and comparison to its peers.
Profit Margin = Net Income / Net Sales or Revenue
• Return on Assets (ROA) – Measuring how management is using its assets to generate earnings. ROA shows how profitable the company is comparative to its assets.
ROA = Net Income / Total Assets
• Return on Equity (ROE) – Calculated as a percentage, ROE shows the amount of income generated by a company from the equity invested by shareholders.
ROE = Net Income / Shareholder’s Equity
• Total Debt/Equity (D/E) – The debt to equity ratio is a metric used to determine how much the company is leveraged on debt. The higher the ratio, the higher it is leveraged or financed by credit.
D/E = Total Liabilities / Total Shareholder’s Equity
• Current Ratio – A measurement determining the company’s ability to pay its short and long-term debt or liabilities.
Current Ratio = Current Assets / Current Liabilities
• Book Value Per Share (BVPS) – In the event of bankruptcy, once all debts are paid, the remaining equity would be valued on a per share basis with this metric.
BVPS = Total Shareholder’s Equity / Total Outstanding Shares
• Net Income – Also referred to as earnings, is a company’s total profit for a specified period of time. Another moniker is ‘net income available to shareholders’.
• Earnings Per Share (EPS) – Earnings per share is the amount of profit earned for each outstanding share.
EPS = Total Earnings / Number of Outstanding Shares
• Dividend Yield – The dividend yield is a ratio expressing the amount of dividends a company pays out each year in relation to its share price.
Dividend Yield = Annual Dividend Payout Per Share / Current Share Price
• Free Cash Flow (FCF) – The amount of cash a company is able to generate after issuing the money needed to grow its assets. Free cash flows allow a company to increase shareholder’s value.
FCF = Operating Cash Flow – Capital Expenditures
• Cash Flow Per Share (CFPS) – A tool to evaluate a company’s financial strength. It gauges the after tax earnings plus depreciation on a per share count.
CFPS = (Operating Cash Flow – Preferred Dividends) / Common Shares Outstanding
All growth measurements are expressed as a percentage. Most market data will display these in increments of either 1, 3, or 5 years. Taking the annual sales, earnings per share (EPS), or annual dividend payout over specified periods of time are used to calculate their growth rates.
• Sales Growth
• EPS Growth
• Dividend Growth