FUNDAMENTALS
EPS: EARNING PER SHARE
• Earnings Per Share (EPS) is a financial ratio that shows
how much profit a company earns for each outstanding
share of common stock
Profitability: A higher EPS generally indicates a more profitable
company.
Investor returns: Investors often use EPS to assess a company's
potential for future returns.
Valuation: EPS is a key component in calculating the Price-to-
Earnings (P/E)to
Key points ratio, which helps investors determine if a stock is
remember:
overvalued or undervalued.
A higher EPS is generally better, but it's important to
compare it to other companies in the same industry.
EPS can be affected by factors like one-time gains or
losses, so it's best to consider it in conjunction with other
financial metrics.
There are different types of EPS, including basic EPS and
diluted EPS, which account for potential dilution from
options and warrants.
PE: Ratio
What is P/E Ratio?
The Price-to-Earnings (P/E) ratio is a financial ratio that compares a company's stock price to its earnings per share (EPS)
Why is P/E Ratio important?
• Valuation: A high P/E ratio suggests that investors are willing to pay a premium for the company's future earnings growth potential.
• Comparison: Investors often compare the P/E ratios of different companies within the same industry to gauge relative valuation.
• Market sentiment: Changes in P/E ratios can reflect shifts in investor sentiment and market expectations.
Key points to remember:
• A higher P/E ratio can indicate that investors are optimistic about the company's future prospects.
• However, a very high P/E ratio might suggest that the stock is overvalued.
• It's important to consider other factors, such as the company's growth rate, debt levels, and industry trends, when evaluating the P/E ratio.
• There are different types of P/E ratios, including forward P/E (based on projected earnings) and trailing P/E (based on past earnings).
• The formula for calculating the P/E ratio is:
• P/E Ratio = Market Price per Share / Earnings per Share (EPS
• EPS = Net Income / Number of Outstanding Common Shares
DEBT/EQUITY RATIO
• The debt-to-equity (D/E) ratio is a financial ratio that measures a company's leverage
or the amount of debt it uses to finance its assets relative to its shareholder equity. It is
calculated by dividing a company's total liabilities by its shareholder equity.
• Formula:Debt-to-Equity Ratio = Total Liabilities / Shareholder Equity
• Shareholder Equity = Total Assets - Total Liabilities
Interpretation:
• Higher D/E ratio: Indicates that a company is using more debt to finance its operations,
which can increase its risk of financial distress. However, it can also lead to higher
returns for shareholders if the company can effectively use debt to generate profits.
• Lower D/E ratio: Suggests that a company is relying less on debt financing and is using
more of its own funds to finance its operations. This can make the company less risky,
but it may also limit its growth potential.
• The ideal D/E ratio varies by industry and company. Generally, a D/E ratio of 1.5 to 2.5
is considered acceptable, but this can vary depending on factors such as the
̌Return on Equity (ROE) in the Stock Market
Return on Equity (ROE) is a crucial financial metric used in the stock market to
assess a company's profitability. It measures how efficiently a company is using
its shareholders' equity to generate profits.
How ROE is Used in the Stock Market:
Company Valuation: Investors often use ROE
RETURN to evaluate the intrinsic value of a company. A higher ROE generally indicates a
more profitable company, which could lead to a higher stock price.
ON EQUITY Comparison: ROE is used to compare the performance of different companies
within the same industry or sector. A company with a significantly higher ROE
than its peers might be considered a better investment.
Investment Decisions: Investors use ROE as one of many factors to decide
whether to buy or sell a stock. A high ROE can be a positive signal, but it's
essential to consider other factors as well, such as the company's growth
prospects, debt levels, and competitive position.
Check other companies in the industry
PRICE VALUE BOOK RATIO
̌Price-to-Book (P/B) Ratio: A Value Investor's Tool
o The Price-to-Book (P/B) ratio is a financial metric used to compare a company's market value to its book value. It's a
popular tool among value investors, who seek to identify undervalued stocks.
o The formula for calculating the P/B ratio is:
o P/B Ratio = Market Price per Share / Book Value per Share
o Market Price per Share: This is the current price at which a company's stock is trading on the market.
o Book Value per Share: This is the value of a company's assets minus its liabilities, divided by the number of outstanding
shares.
o What does a high or low P/B ratio mean?
o Low P/B Ratio: A low P/B ratio suggests that the market is undervaluing the company's assets. This could be a sign of
an undervalued stock, but it's important to consider other factors as well, such as the company's financial health and
future prospects.
o High P/B Ratio: A high P/B ratio indicates that the market is placing a premium on the company's assets. This could be a
sign of an overvalued stock, but it's also possible that the market is anticipating future growth or profitability.
CURRENT RATIO
Current Ratio: A Liquidity Measure
The current ratio is a financial ratio that measures a company's ability to pay its short-term obligations. It compares a
company's current assets to its current liabilities.
How is the current ratio calculated?
The formula for calculating the current ratio is:
Current Ratio = Current Assets / Current Liabilities
Current Assets: These are assets that are expected to be converted into cash within one year, such as cash, accounts
receivable, and inventory.
Current Liabilities: These are obligations that are due within one year, such as accounts payable, notes payable, and
accrued expenses.
• High Current Ratio: A high current ratio indicates that a company has a strong ability to pay its short-term debts. This
can be a positive sign, as it suggests that the company is financially stable and has sufficient liquidity. However, a very
high current ratio might suggest that the company is not using its assets efficiently.
• Low Current Ratio: A low current ratio indicates that a company may have difficulty paying its short-term debts. This
can be a red flag, as it suggests that the company may be facing liquidity problems.
OP CASH FLOW
Operating Cash Flow (OPCF) is a financial metric that indicates the amount of cash a company generates or consumes from
its primary business operations. It provides a clearer picture of a company's financial health compared to net income,
which can be influenced by non-cash items like depreciation and amortization.
How is OPCF calculated?
There are a few methods to calculate OPCF, but the most common one is the indirect method. Here's a simplified version:
OPCF = Net Income + Depreciation + Amortization - Gains/Losses from Sale of Assets - Changes in Working Capital
Net Income: This is the company's profit after deducting all expenses.
Depreciation and Amortization: These are non-cash expenses that reduce net income but do not involve the outflow of
cash.
Gains/Losses from Sale of Assets: These are non-operating items that can affect net income but do not reflect the
company's core operations.
Changes in Working Capital: This includes changes in current assets (e.g., accounts receivable, inventory) and current
liabilities (e.g., accounts payable).
What does a high or low OPCF mean?
High OPCF: A high OPCF indicates that a company is generating a significant amount of cash from its core operations.
This is generally a positive sign, as it suggests that the company is financially healthy and able to fund its growth, pay off
debt, or return value to shareholders.
Low OPCF: A low OPCF might suggest that a company is struggling to generate cash from its operations or is using cash
to fund growth or pay off debt. However, it's important to consider other factors, such as the company's industry, growth
stage, and capital expenditures.
