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Stocks 108: Learn the Lingo--Basic Ratios

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1.
Imagine that your company has 20 million shares of stock outstanding, the stock is currently trading at $10 per share, the price/earnings ratio is 20, and your sales this year are $5 million. As the chief financial officer, you must calculate your company's market capitalization. What is it?
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$200 million. Market cap is stock price multiplied by number of shares outstanding, so the figure is $200 million. Price/earnings ratio and sales do not factor into market cap.
2.
Companies in which of the following industries would likely have the highest price/book ratios?
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Pharmaceuticals. The highest P/B ratios are in fields such as pharmaceuticals and consumer products, where intangibles are more important.
3.
Earnings per share (EPS) is a company's net income divided by its number of shares outstanding.
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True. As such, EPS can give you a quick idea of a company's profitability, though it has its limits.
4.
The price/cash flow ratio measures cash rather than paper profits.
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True. For this reason, the ratio has a certain reliability that management likes.
5.
A company's price/sales ratio is its stock price divided by _______.
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Sales per share. Since we are using stock price, we must also use sales per share.
6.
A company's gross margin is calculated by dividing _______.
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Gross profits by revenues.
7.
If a company has earned $1.50 per share and its share price is $30, what is its P/E?
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20. The P/E is determined by dividing the price per share ($30) by the earnings per share ($1.50), yielding a P/E of 20 in this case.
8.
A company's dividend yield is calculated by _______.
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Dividing annual dividend per share by stock price per share.