Price to earnings (P/E) ratio: This is one of the most widely used measures. It tells us the price of the stock relative to the earnings of the company. In general, a stock with a lower P/E is seen as 'cheaper' for what you are getting than a stock with a higher P/E. For large cap stocks, the ratio should be under 25. For all stocks, it should not exceed 50. A higher P/E normally is attached to a riskier stock. A stock with no earnings will not have a P/E ratio. Price to sales (P/S) ratio: This is similar to a P/E ratio in that it is a stock valuation measure. Lower numbers show that the stock costs less for the amount of sales the company is producing. Ideally, the P/S should be around 1. Return on Equity (ROE): This is calculated by dividing a company's net income by its common stock equity. Essentially, this is the rate of return the company earns on the things it owns. The ROE should be increasing by at least 10 percent. Debt to Asset (D/A) ratio: This is a simple calculation of debts divided by assets. Debt should be less than half compared to assets in a healthy company. Beta: The calculation of this uses regression analysis of past prices and is too complex to discuss here, but the Beta is basically a measure of share price volatility. The market exhibits a beta of 1.0 and thus a stock with a similar beta will follow the market. A stock with a beta of 2.0 will increase twice as much as a bull market and decline twice as much as a bear market, all things constant. A stock with a negative beta exhibits price movement opposite of the market. Market Capitalization: The market cap is figured by multiplying the stock price by the number of outstanding shares. Less than $1 billion is considered a small cap, between that and $5 billion a midcap, and over $5 billion a large cap. |