[ Pobierz całość w formacie PDF ]
For example, since the EPS is determined by dividing all the money allotted for dividend
payments by the number of common shares outstanding, a company can raise its EPS by
reducing the amount of stock outstanding. The resultant rise of the EPS then creates a
deceptive picture of the stock's growth. This is a common occurrence with companies that
are buying back their own stock.
For that same reason, an EPS might decline while the overall financial health of the company
was improving. An EPS might drop, for example, because of a stock split, because the
company converted its outstanding bonds and/or preferred stock, or because the company
issued rights or warrants. In each of these cases, the EPS of the company would drop
independently of the real financial condition of the company.
It is important, then, to remember that although an EPS is a relatively simple tool for
measuring a company's growth potential and financial health, that same simplicity offers
other investors and companies the option to use different numbers to determine an EPS. Be
sure you are all reading from the same page.
TIP
The mass of statistical information about stocks isn't millions of different equations
that must all be memorized, but rather it's much of the same information presented
in different forms to highlight different aspects of the same stock.
Current/Dividend Yield
The current or dividend yield indicates the percentage represented by the annual dividend
payments relative to price of the stock. In other words, how much money did you make from
your investment (your investment being the stock you purchased)? If this type of
measurement is sounding vaguely familiar, that is because the current yield is the exact
opposite of the P/E ratio. In fact, the formula to determine the current yield is to flip the P/E
ratio formula upside down:
Earnings over 12-Month Period: $1
Current Market Price of Stock: $10
= Current Yield: .10%
Thus, $1 ÷ $10 = .10.
Stocks with high current yields are typically large blue chip stocks, or other stocks with limited
growth potential, making them particularly attractive to investors looking for steady income
streams from their stock. Since these companies have limited growth potential, most of their
profits are paid out to their investors, rather than being reinvested in the company for such
things as expansion or research and development. Stocks with low current yields are usually
reinvesting their profits, leaving little if anything to pay out to their investors. Logically, then,
low current yields are the terrain of growth stocks, which an investor would purchase for
anticipated capital growth rather than a steady income stream.
Plain English
Current yield depicts the dividend payment of a stock as a percentage of the
stock's market price. A current yield is the opposite of a P/E ratio.
It is important, as with any measurement, to ensure that you know the baseline from which
the measurement is being generated. Simply because a current yield is high or low is not an
absolute indicator of anything. Remember that the current yield formula is totally dependent
on the amount of dividends paid and that amount is the arbitrary decision of a company's
management. That's right; no company is obligated to pay any certain amount in dividends. A
company in very bad financial health might decide to pay out 90 percent of all profits in
dividends, whereas a company with excellent prospects may decide to pay out only 10
percent of its profits in dividends, choosing to reinvest the balance in expansion. In these
cases, the current yield would then give an inaccurate picture of the company. The current
yield is still an excellent tool with which to measure a company's financial success and
potential. The investor must use the current yield within the context of all its background
information for maximum results.
Current and Debt Ratios
The current ratio and the debt ratio differ from the previous measurements in that their focus
is more on the company's constitution rather than its health. This means that the current and
debt ratios measure the internal infrastructure of the company, including its level of leverage
and its solvency potential, rather than its external dealings.
Plain English
Current ratio is a projection of the company's ability to meet its financial obligations
and otherwise remain solvent. Debt ratio is a projection of the total debt carried by a
company as compared with the assets and cash flows it maintains.
Think of it this way. Say you make $100,000 a year, and your brother makes $50,000 a year.
However, you've got substantially more debt on credit cards than he does (probably because
you didn't read Lesson 3, "How Much Do You Have to Invest?" as well as you should
have). He's carrying about $5,000 in debt, or about 10 percent, while you've racked up about
$50,000, or about 50 percent. It doesn't take a genius to figure out that I'm going to be a lot
more comfortable lending your brother money rather than you, for a number of reasons:
1. He's obviously managing his money better than you are (better management). Thus, I'm
convinced he's going to handle my (loaned) money more responsibly than you will.
2. He's got a much lower debt percentage to carry than you do. All other things being equal
(for both of you, rent = 25 percent of your take-home pay, food = 20 percent of your
take-home pay, etc.), you are paying a higher relative loan percentage, even though you
are also making more money. And struggling to make debt payments of 50 percent is
3.
really struggling.
3. I've got a better chance of getting some of my money back from your brother should
both of you go out of business or, in this case, declare bankruptcy. Remember again
that we're working on percentages here. Remembering that taxes, fees, etc., are usually
based on a percentage rather than the amount, your brother would be liable for only
about 10 percent of his total income; whereas you would be liable for half. I'll take my
chances with your brother.
So the formula to determine the current ratio is &
Assets ÷ Liabilities = Current Ratio
This current ratio would indicate the probability that in the case of insolvency (bankruptcy),
the investor would get all or some of his or her money back after all debts, bonds, and
preferred stock were paid off.
On the flip side, the formula to determine the debt ratio is &
Amount Owed to All Outstanding Bonds
÷ The Company's Total Capitalization
= Debt Ratio
This debt ratio would indicate the company's ability to meet the payments of the debt it
carries, or how close the company is to bankruptcy. Using this ratio together with the current
ratio, an investor can determine how close the company is to bankruptcy and what the
chances are of recovering his or her investment, should bankruptcy occur. Although finding
out a company's debt ratio may seem a pessimistic attitude to take, it's certainly better to
know this type of information before making your investment rather than after the fact.
Again, remember that these formulas are useful only to the extent that they are used within
their respective contexts. That 10-20 rule for high and low ends still applies as it did with the
P/E ratios. However, this figure is going to vary widely, depending on the industry. Some
companies, such as those that deal with intellectual property such as computer operating
systems like Microsoft Windows, will automatically have fewer tangible assets, creating a low
debt ratio (under 20 percent), even though they still might be an excellent investment. Other
companies, such as manufacturing firms like GM which produces automobiles, may carry
[ Pobierz całość w formacie PDF ]