Stocks Beginner: Learn the Lingo--Basic Ratios

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1.
Earnings per share (EPS) is a company's _______.
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Net income divided by its number of shares outstanding. EPS uses net income.
2.
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.
3.
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.
4.
The three types of a business's profit margins are gross margin, net margin, and operating margin.
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True.
5.
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.
6.
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%.
7.
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.
8.
If a company's market capitalization is $100 million and there are 5 million shares of stock outstanding, what is the stock price right now?
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$20. Market cap is stock price multiplied by number of shares outstanding.