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Stocks 108: Learn the Lingo--Basic Ratios

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1.
A stock's price/earnings ratio is its price divided by its _______.
Choose wisely. There is only one correct answer.
Earnings per share. The formula uses earnings per share.
2.
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.
3.
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.
4.
A company's gross margin is calculated by dividing _______.
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Gross profits by revenues.
5.
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.
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.
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.
8.
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.
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