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Stocks 402: Using Ratios and Multiples

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1.
A company's price/earnings growth ratio uses _______.
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Future estimates. The price/earnings growth ratio is used to get a sense of what a company will be like in the future.
2.
One advantage of earnings yields over price/earnings ratios is that we can use them to compare investments in other classes.
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True. This way, we can compare the returns that the different types of investments offer.
3.
A stock with a high dividend yield is a good bargain for an income investor to buy.
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Maybe. A dividend yield can be high for many reasons, either good or bad. On the bad side, the stock price might be dropping deeply due to financial troubles; that could proportionately raise the dividend yield. Caution is always key.
4.
In a price/book ratio, what exactly is the "price" part of it?
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The stock's market price. The price is the market price, while the "book" part is the book value of a share.
5.
What does a company's price/sales ratio measure?
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Its stock's market price divided by its sales per share. As such, it is a very useful ratio for businesses.
6.
A company's price/earnings ratio is most meaningful when it is compared with which of the following?
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Its historical P/E ratio. A company's P/E ratio is most meaningful when it is compared with its historical P/E ratio. The most useful way to use a P/E ratio is to compare it with a certain benchmark. Good benchmarks are the P/E of another company in the same industry, the P/E of the entire market, or the P/E of the same company at a different point in time. It would not be very meaningful to compare a company's P/E ratio with its P/S ratio or historical P/B ratio, because the latter two metrics are used to measure different aspects of the company's performance (sales and book value) relative to its stock price.
7.
The formula for cash return is free cash flow plus net interest expense, the sum of which is then divided by _______.
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Enterprise value. Enterprise value is the figure that goes into the denominator.