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Stocks 108: Learn the Lingo--Basic Ratios

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1.
An advantage to using the price/sales ratio over the price/earnings ratio is that sales are harder to manipulate than earnings.
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True. Sales are more straightforward. Also, there are fewer accounting estimates involved than with earnings.
2.
A company's gross margin is calculated by dividing _______.
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Gross profits by revenues.
3.
Price/book ratio compares what with what?
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A stock's market value with its book value. The 'price' part of the formula refers to the stock's market value.
4.
If a company's P/E is 30, its earnings yield is _______.
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3.3%. The earnings yield is calculated by inverting the P/E ratio. In this case the earnings yield is 1/30 or 3.3%.
5.
A company's dividend yield is calculated by _______.
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Dividing annual dividend per share by stock price per share.
6.
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.
7.
A stock's price/cash flow ratio is calculated by dividing the stock price by the _______.
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Operating cash flow per share.
8.
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.