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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.
All else equal, what does a rising dividend yield mean for a stock?
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The stock is becoming less expensive. A rising dividend yield means that the stock is becoming less expensive because a higher percentage of the stock price is being paid out in annual dividends.
3.
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.
4.
A company's gross margin is calculated by dividing _______.
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Gross profits by revenues.
5.
A stock's price/earnings ratio is its price divided by its _______.
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Earnings per share. The formula uses earnings per share.
6.
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.
7.
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.
8.
A company's market capitalization is calculated by _______.
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Multiplying its stock price by the number of shares outstanding. For example, if there are a million shares of stock trading at $10 per share, the market capitalization is $10 million.