Stocks Beginner: 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.
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.
3.
Company X pays an annual dividend of $1.00 per share, and its stock trades for $25. What is its dividend yield?
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4%. The dividend yield is found by dividing annual dividend per share by stock price per share. Therefore, 1/25 equals 4%.
4.
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.
5.
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%.
6.
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.
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.
The three types of a business's profit margins are gross margin, net margin, and operating margin.
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True.