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Stocks 108: Learn the Lingo--Basic Ratios

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1.
Earnings per share (EPS) is a metric that should not be used in isolation.
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True. As with other financial ratios, you should use EPS along with other metrics.
2.
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.
3.
Companies in which of the following industries would likely have the lowest price/book ratios?
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Utilities. The lowest price/book ratios are found in capital-intensive industries, such as utilities.
4.
A company's dividend yield is calculated by _______.
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Dividing annual dividend per share by stock price per share.
5.
If two companies both have the same level of revenue, but company A turns more of every sales dollar into profit than company B, which will probably have a higher price/sales ratio?
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Company A. Company A is generating more earnings per dollar of sales than Company B. This means Company A needs fewer sales to generate the same level of earnings, and the market is likely to reward Company A with a higher P/S ratio.
6.
A stock's price/cash flow ratio is calculated by dividing the stock price by the total operating cash flow.
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False. The ratio uses operating cash flow per share, not total operating cash flow.
7.
The three types of a business's profit margins are gross margin, net margin, and _______.
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Operating margin.
8.
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.