Lesson 14-3: Factors and Lingo
Attempt: 1
Factors and Lingo
Not only do you need to know how to evaluate stock before you invest in a company, you will need to be able to evaluate a stock’s performance after you invest in them. There are many things that determine the strength of a particular stock:
o A company’s ability to generate future earnings (referred to as corporate earnings) has a huge impact on current stock prices. Higher earnings = higher stock value.
o Earnings Per Share (EPS) is a measure of profitability:
o EPS = after tax income / shares of common stock
o A rise in EPS is a positive sign.
Learn more about EPS at:
o Price Earnings Ratio (PE) measures how much an investors pays for their earnings.
o PE = Price per share / earnings per share
o A PE of 20 says an investor bought a share of stock for $20 and the company reported $1 of annual earnings for that share. A PE of 30 says an investor paid $30 for that $1 of annual profit.
o The higher the PE (usually over 20), the more optimistic investors are for higher future earnings.
Learn more about PE at:
Investopedia's Understanding the P/E Ratio
o Projected Earnings is the estimated earnings for a Corporation over a specific time-frame.
o While EPS and PE are based on past data, projected earnings may be more relevant.
o This is an estimate and is not set in stone nor always correct.
o If a company’s projected earnings > Last year’s earning, then that is a good sign for future performance expectations.
o Dividend Yield is a measure of the value of an investment
o Dividend Yield = Annual Dividend / current price per share
o A dividend yield increase is considered a good sign
o Total Return (on your stock investment)
o Total Return = Capital Gains (when you sell the stock) + Dividends (you received the entire time you held the stock)
o Book Value
o The amount of money an investor would get if the company liquidated its assets
o Book Value = Assets – Liabilities; to determine the amount individual shareholders would receive you would have to divide the total book value by the number of shares.
Learn more about book value per common share at:
Investopedia's Book Value per Common Share