“Earnings per share (EPS)” is a basic measure of how a company is earning. If it can’t consistently earn money for itself, chances are it can’t earn money for you as an investor. To compute, take the net profits of the corporation then divide by the number of outstanding shares of common stock. An example is: Puregold has 2,766,406,250 outstanding common stocks and net income for the year 2012 is P2,026,802,429. The EPS is P0.73. In other words, for every share of stock Puregold has issued, it earned about P0.73 for the year 2012.
A corporation’s goal is for its quarterly/yearly earnings to beat the earnings for the previous quarter or year. Remember, over the long term, earnings are what count to the market and to investors. Increases in earnings are a good sign. What you always want to see is an increase by at least 20% over last quarter/year. You also should be looking at past and future annual earnings/projection. For instance, with Puregold, you would want to see not only has it had good earnings growth over the past five years, but also that earnings projections show a continued growth pattern. If earnings grow, so, probably, will the price of the Puregold’s stock.
Another important measurement is the so-called P/E ratio. It is a measure of the value of a common stock. To compute the ratio, simply divide the market value share price of a stock by its EPS. In our example, Puregold stock is trading at P46 (May 10, 2014) and has earnings of P0.73, the P/E ratio is 63 (P46 divided by P0.73, which equals to 63) The P/E ratio gives investors an idea of how to gauge the current price of a stock or its trading value. The higher the P/E ratio, the riskier the stock is likely to be. Traditionally speaking, stocks with low P/E ratios might be considered a good buy at their current market price. Why? Because if a stock is undervalued but research shows that it is a good stock, then its price will probably go up someday. Also, if a stock has a low P/E ratio and the market heads south, the value of that stock probably won’t fall as much as the value of stocks with high P/E ratios. You should also more interested in the stock’s past and future earnings per share. The PE ratio has more to do with current price and earnings than anything else.
Why do people buy stocks that have high P/E ratios? Well, they think that particular stocks will have sizable earnings in the future, and they are buying it in anticipation of earnings growth. They have seen the stocks’ prices shoot up and they are just jumping on the bandwagon effect. Note also that each category of stock has its own average P/E ratio. For instance, bank stocks sell at an average P/E ratio of 15 or 16, while other category, such as oil, holding companies has different average P/E ratio. You can use also the P/E ratio of the overall stock market to determine the value of a stock.
The volume of shares traded tells you of the current supply and demand for that stock. Remember, if demand exceeds supply, this can push the price of the stock upward. If you happen to see an increase in volume this could be an indicator that there is interest in this stock from a large or many investors. Before making a stock purchase, always look at the supply and demand of a stock. If a stock’s price goes up on very little volume, one possible interpretation is that the move is not a solid one. But if the stock’s price goes up on strong volume, it is a sign that the move is a more solid one. It means many people are interested in the stock and/or institutional investors (big mutual funds) are starting to buy the stock in large blocks. On the other hand, if the stock has very small volume or it does not trade at all, this is what is known as in illiquid stock. It is most very speculative, and be very careful about buying it. It is difficult to sell at once without taking a large loss.
The book value of a stock is the supposed true value of that corporation, based on the historical cost of the assets owned by the company. The book value does not necessarily bear any relation to what stock is trading for on the market. If the book value of stock is P7 a share and it is selling at P46, you would want to find out why investors are paying that much for that stock. One reason is the book value is often lower than the share price because the assets tend to be valued at their original purchase price, less depreciation. Seldom, we see a stock selling at or below their book value. At the end of the 20th century, the market was selling at around 6 or 7 times book value – and investors were buying. Remember, book value is just an indicator to keep in mind.