Wednesday, April 18, 2007

What Does It All Mean?

In a lot of my articles, I discuss various financial ratios relating to the stocks that are discussed. Some of the readers of my articles are new investors that are unfamiliar with how they work or what they mean, and have asked for clarification. So here is some clarification [generally speaking], in very simple terms. You can bookmark this page for future reference.

Price Earnings Ratio (P/E Ratio) This is the price per share divided by the earnings per share. The lower the number the better. A P/E ratio below 15 is better than a P/E ratio above 25.

Price Sales Ratio (P/S Ratio) This is the price per share divided by the sales per share. The lower the number, the better. A P/S ratio below 1 is great, between one and two is OK, and over 2, not so good.

Yield - This is how much return an investor receives from the dividend payments. It is calculated by the dividends per year divided by the price per share. The higher the better.

Price Earnings Growth Ratio (PEG) This is the Price Earnings ratio divided by the estimated future growth in earnings. The lower the better. Below one is good, between 1 and 2 is OK, and above 2 is not so good.

Quarterly Earnings Growth Year Over Year - This is the percentage increase in earnings for the current quarter versus the same quarter a year ago. The higher, the better. This is especially useful for seasonal companies, where sales and earnings increases take place around the same time each year; comparing the current quarter with the previous quarter would be almost meaningless.

Quarterly Revenue Growth Year Over Year - This is the percentage increase in revenue for the current quarter versus the same quarter a year ago. The higher, the better.

Book Value Per Share - What the shares would be worth if the entire company was liquidated, all debts paid off, and all cash that was left distributed to the shareholders. If the book value per share is higher than the price per share, that is better than the stock selling above book value.

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