Market Ratios

Dividend Yield

Dividend yield is a way to measure how much cash flow you are getting for each dollar invested in an equity position. Measures how much "bang for you buck" you are getting from dividends. In the absence of any capital gains, the dividend yield is effectively the return on investment for a stock. When companies pay high dividends to their shareholders, it can indicate a variety of things about the company, such as that the company might currently be undervalued or that it is attempting to attract investors. On the other hand, if a company pays little or no dividends, it may indicate that the company is overvalued or that the company is attempting to grow its capital.

Earnings Per Share

Earnings per share is the portion of a company's profit allocated to each outstanding share of common stock. Basic EPS does not factor in the dilutive effect of additional securities. The diluted EPS is the worst case scenario for the earnings per share if certain securities were converted to common stock.

Market Ratios

Market ratios are used to evaluate the current share price of a publicly-held company's stock.

Price to Earnings Ratio

The P/E ratio relates earnings per common share to the market price at which the stock trades, expressing the "multiple" that the stock market places on a firm's earnings. For instance, if two competing firms had annual earnings of $2.00 per share, and Company A shares sold for $10.00 each and Company B shares were selling at $20.00 each, the market is placing a different value on the same $2.00 earnings: a multiple of 5 for Company A and 10 for Company B. The P/E ratio is the function of a myriad of factors, which include the quality of earnings, future earnings potential, and the performance history of the company.

PEG Ratio

The PEG ratio is used to determine a stock's value while taking the company's earnings growth into account, and is considered to provide a more complete picture than the P/E ratio. A PEG ratio below 1 is desirable. To distinguish between calculation methods using future growth and historical growth, the terms "forward PEG" and "trailing PEG" are sometimes used. PEG Ratio Example: Company A P/E ratio = $46 / $2.09 = 22 Company B P/E ratio = $80 / $2.67 = 30 Company A Earnings Growth Rate = ($2.09 / $1.74) - 1 = 20% Company B Earnings Growth Rate = ($2.67 / $1.78) - 1 = 50% Company A PEG ratio = 22 / 20 = 1.1 Company B PEG ratio = 30 / 50 = 0.6 Many investors may look at Company A and find it more attractive since it has a lower P/E between the two companies. But compared to Company B, it doesn't have a high enough growth rate to justify its P/E. Company B is trading at a discount to its growth rate and investors purchasing it are paying less per unit of earnings growth.

Dividend Payout Ratio

The dividend payout ratio provides an indication of how much money a company is returning to shareholders vs how much it is keeping on hand to reinvest growth, pay off debt, or add to cash reserves (retained earnings). If a company's payout ratio is over 100%, it is returning more money to shareholders than it is earning and will probably be forced to lower the dividend or stop paying it altogether. Long-term trends in the payout ratio also matter. A steadily rising ratio could indicate a healthy, maturing business, but a spiking one could mean the dividend is heading into unsustainable territory.