Here are some advanced stock market terms you may need to know:
Book value
Refers to how much equity there is in a company today. It will be listed in the company’s annual report.
Example: If a company’s assets are worth $50 million and it owes $30 million, its book value is $20 million.
Book value per share
Calculated by dividing the book value by the number of shares the company has issued.
Example: Let’s say a company with a book value of $20 million has issued one million shares. The book value per share would be $20 ($20 million divided by one million shares).
Earnings per share (EPS)
If a company paid out all its profit to its shareholders, this is the amount each share would get. To do the math, divide the company’s total profit by the number of shares.
Example: If a company’s profit is $200 million and there are 10,000 shares, the EPS is $2,000.
EPS helps you compare two companies in the same industry to see how they’re doing. It doesn’t tell you whether it’s a good stock to buy, or what the market thinks of it. For that information, you need to look at some performance ratios.
Tip: Look at each company’s track record of earnings. Companies that show steady, consistent growth, year after year, will often outperform companies with volatile earnings over time.
Price to earnings (P/E) ratio
Measures the relationship between the earnings of a company and its stock price. It tells you whether a stock’s price is high, or low, compared to its earnings. Calculated by dividing the first number by the second.
To do the math, you need to know two things: (1) the current market price of one share of a company's stock; and (2) the company's earnings per share.
Example: Let’s say a company's stock currently sells for $50 a share and its earnings per share are $5. So it has a P/E ratio of $50 divided by $5 = 10.
Tip: Some investors consider a company with a high P/E overpriced, and they may be right. Sometimes, though, a company with a high P/E today may offer higher returns, and a better P/E, in the future. How do you know? You’ll likely have to look at a lot of other numbers before you decide.
Price to earnings ratio to growth ratio (PEG)
Helps you understand the P/E ratio better. Calculated by dividing the P/E ratio number by the company’s projected growth in earnings. The lower the number, the less you have to pay to get in on the company’s expected future earnings growth.
Example: A stock with a P/E of 30 and projected earnings growth next year of 15% would have a PEG of 2 (30/15 = 2). A stock with a P/E of 30 but projected earnings growth of 30% will have PEG of 1 (30/30 = 1).
What do those numbers mean? A stock with a high P/E and high projected earnings growth, like the first example, may be a good value. A stock with a low P/E and low or no projected earnings growth, like the second example, may not.
Price to book value ratio (P/B)
Looks at the value the market puts on a company and the value the company has stated in its financial books. Calculated by dividing the current price per share by the book value per share.
Tip: Most of the time, the lower the P/B is, the better. Why? You are paying less for more book value. Investors who look for well-priced stocks with reasonable growth potential would use a low P/B as a tool to identify possible stock picks.
Dividend Payout Ratio (DPR)
Measures what a company pays out to investors in dividends compared to what the stock is earning. It provides an idea of how well a company’s earnings support the dividend payments. Calculated by dividing the annual dividends per share by the earnings per share (EPS).
Example: If a company paid out $1 per share in dividends and had an EPS of $3, the DPR would be 33% (1/3 = 33%).
Tip: More mature companies will typically have a higher DPR. They believe that paying more in dividends is the best use of their profits for the firm and its shareholders. Growing companies are likely to have less or no earnings to pay out dividends. Therefore, their associated DPR would be low or zero.
Dividend yield
Measures the return on a dividend as a percent of the stock price. Calculated by dividing the amount of money a company pays in dividends each year for one share divided by the price per share.
Example: If a stock is trading for $10 and pays a dividend of 50 cents a year, the dividend yield is 5%.
Older, well-established companies tend to have a higher dividend yield than younger companies, since they would pay out more dividends.
Return On Equity (ROE)
Measures how wisely a company uses its assets to make money. Calculated by dividing what the company made in a given year (after expenses) by its book value.
Example: Let’s say a company reports that it made $10.3 million in 2005. Its book value is $60.8 million. To get the ROE, you divide 10.3 by 60.8, then multiply by 100. This equals a ROE of about 17%.
Tip: A healthy company may produce an ROE in the 13% to 15% range. Like all measures, you will get a better picture if you compare the ROE of companies in the same industry.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.
