Stocks Beginner: 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.
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.
3.
If a company has earned $1.50 per share and its share price is $30, what is its P/E?
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20. The P/E is determined by dividing the price per share ($30) by the earnings per share ($1.50), yielding a P/E of 20 in this case.
4.
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.
5.
A company's gross margin is calculated by dividing _______.
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Gross profits by revenues.
6.
A company's price/sales ratio is its stock price divided by _______.
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Sales per share. Since we are using stock price, we must also use sales per share.
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.
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.