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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.
A company has an enterprise value of $225 million, free cash flow of $15 million, and zero net interest expense. What is its cash return?
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6.7%. Cash return is equal to free cash flow divided by enterprise value. In this case, that's $15 million/$225 million, or 6.7%.
3.
If a stock has a price/earnings ratio of 20, based on a price of $100 and an earnings per share of $5, its earnings yield is _______.
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5%. Earnings yield can be gotten by inverting the price/earnings ratio.
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.
A firm's price/sales ratio is found by dividing its stock price by its _______.
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Sales per share. Since we are using stock price, we must also use sales per share.
6.
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.
7.
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.