When you trying to put your money into a company, it is better for you to analyze the company using numbers. Numbers don’t lie, the statistics would always give you hints about the situation, performance, and potential of the company. Though you may argue that sometimes things cannot be explained with numbers, these numbers would at least give you a standard to refer to before you invest your money.
1. Earnings Per Share (EPS)
You can work out earnings by taking a company’s gross profit minus away all expenses. You can get your gross profit by using your sales revenue to minus the cost of sales. You might be wondering how does the cost of sales not include all expenses, it is simply because there are other expenses to take into accounts such as the utility bill and wages and salaries.
EPS can be calculated using EPS = Earnings / Total number shares issued
By calculating the EPS, you are able to roughly see how profitable the company is and this can tell you how well they are doing. If the EPS is high, then that means that the company is likely to be doing well and they can be a good investment target.
2. Price Per Share/Earnings Per Share(PE Ratio)
PE Ratio is used to project the growth of a company in the near future. We will be using the price of a share of a company to divide by the earnings per share of the same company. The price of a share is easily obtained as it should be displayed in the market.
You can use the PE Ratio to determine if the share price is cheap or expensive. Having a high PE Ratio means that you are going to pay for the shares at a higher price as compared to the company’s earnings. In this case, you might want to go for the shares with a lower PE Ratio as this indicates that the price for the shares would be lower than the earnings of the company, this means that the investment may be of great value as not many people are buying it.
In addition, you should also compare the PE Ratio to the industry the company is in. This is so that you can study how the industry is doing and how the company is matching it. Obviously, if the PE Ratio of the company is lower than the industry’s average PE Ratio, then you should consider investing in that company as that may indicate that the company is doing well in the sector. If you are looking to invest in a company with a high PE Ratio, be careful and ensure that you have reasons to back up that the company is able to grow well in the near future.
3. Price Per Share/Earnings Per Share to Growth Ratio (PEG)
As supposed to people thinking that PE Ratio might have certain limitations to make it not so useful but it also depends on you, you should know that you can never rely on just one type of data to determine if the company is a good investment.
Unlike PE Ratio, PEG Ratio uses a range to gauge if a share is profitable. Using PEG Ratio, it suggests that the good range is anything near 1. Being 1 means that you are paying fairly for the share and you can hold onto it.
In cases where it is above 2, it is more advantageous to sell your shares away as this means that people are buying at a price where it overvalued and you would make profits by selling them away.
When the PEG Ratio is below 0.5, you should and buy more shares of that company. This is because when the PEG Ratio is this low, it means that the price of the share is being highly understated and the price may rise and it can be a good investment.
4. Price-to-Book Ratio
The Price-to-Book Ratio is used to weigh the difference between the market price of the share against the book value of the company. The book value is simply the net asset of a company, using the total assets to minus away the total liabilities.
To calculate the PB Ratio, you have to calculate the book value per share first. You have to take the book value divided by the number of shares issued by the company. You then take the price per share divided by the book value per share to get the PB Rato.
The PB Ratio would be better to be below or equal to 1. If it’s equal to 1, it means that you can buy the shares as you buying the shares
When the PB Ratio is below 1, you can consider buying the shares as this means that by buying shares of the company, you are buying parts of the company for less than what they are worth.
If the PB Ratio is higher than 1 or even 2, you have to be mindful that you might be paying more for the shares.
5. Dividend Yield
There are certain companies that would issue dividends. Sometimes, having dividend payouts can mean that the company is financially doing well as they are able to draw out a part of their profit to issue dividends. Usually, if a company is able to constantly provide dividends over a few years, it means that the quite a stable investment.
The dividend yield is often shown as a percentage of the price of the stocks against the dividend payout. A good rate of dividend yield would be around 4 to 6 percent
With that being said, having a high dividend yield might not be a good thing. Having a high dividend payout means that the company is giving you a larger portion of their profit and this means that the money is not being reinvested into the company. This means that the company is not confident that they can grow well in the near future.
