Stocks Beginner: Learn the Lingo--Basic Ratios

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1.
The three types of a business's profit margins are gross margin, net margin, and _______.
Choose wisely. There is only one correct answer.
Operating margin.
2.
Price/book ratio compares what with what?
Choose wisely. There is only one correct answer.
A stock's market value with its book value. The 'price' part of the formula refers to the stock's market value.
3.
A company's dividend yield is calculated by _______.
Choose wisely. There is only one correct answer.
Dividing annual dividend per share by stock price per share.
4.
An advantage to using the price/sales ratio over the price/earnings ratio is that sales are harder to manipulate than earnings.
Choose wisely. There is only one correct answer.
True. Sales are more straightforward. Also, there are fewer accounting estimates involved than with earnings.
5.
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.
6.
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?
Choose wisely. There is only one correct answer.
$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.
7.
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.
8.
If a company's P/E is 30, its earnings yield is _______.
Choose wisely. There is only one correct answer.
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%.