You always wanted to go a bit deeper into stock analysis?
Let's then first start with some important valuation and qualitative metrics.
They will allow you to compare the valuation of a company to its sector and peers, so better get this right from the start!
Price-to-earnings ratio (P/E)
It measures the current share price in relation to earnings per share. For example a P/E ratio of 10x, means that an investor is ready to pay 10x times the earnings to own the share. It is a common measure to compare valuation of companies in a same sector.
The ratio is usually looked after on a trailing basis, meaning the last 12 months, and on a forward-looking basis, going from 1 to up to 2 years ahead.
Price-to-book ratio (P/B)
It measures the market value of a stock relative to its book value. The ratio represents how much an investor would be willing to pay for a company if it would liquidate all of its assets and repaid all of its liabilities (such as debt).
Obviously the higher the ratio, the higher valued the company is.
It measures the value of a company to its operating profit (EBITDA). It's one of the most popular used measures to value a company.
Unlike the P/E ratio, which is purely based on market capitalization, this ratio looks at the firm's value comprising not only of its equity (i.e. market capitalization) but as well debt plus any minority interests.
Earnings per share
It's the company's net profit divided by the number of shares outstanding. It measures how much money a firm makes for each share. While earnings growth is important, you shouldn't just look at earnings when analyzing a stock, rather judge it in relation with the share price (P/E ratio)
Dividends per share
It's the company's paid dividends divided by the number of shares outstanding. It measures how much dividend a firm pays out to its shareholders for each share they hold. Not every company will pay dividends, as some may prefer to reinvest the extra earned cash into the company. A well-known example for this is Amazon!
It represents in percentage points how much of a company's earnings are paid out to shareholders as dividends. The higher the better, however only until a certain point. A payout ratio over 100% indicates that the company is paying out more in dividends that it earnings can support, which can be seen as unsustainable.