Stock Market Background Check

Stock Market Background Check

Return on Equity: The ultimate measure of a stock’s 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 company’s 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 year’s projected earnings from an analyst. A stock’s 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 you’re buying more earnings power with your money. The lower the P/E ratio, the better off you are.