14.7 Lessons learnt
- Looking at stocks from a Fundamental perspective is mainly to determine the real value of a stock
- Earnings per share are calculated by dividing a company’s profit by the outstanding shares of common shareholders.
- The price to earnings (PE) ratio is the ratio to value a company’s share price with its earnings per share.
- The average PE ratio for the S&P 500 historically ranges from 13 to 15.
- The PEG ratio is used to place in perspective a company’s P/E. It also determines the discount you are buying the stock of this company at against the growth rate
- The price to book ratio is important as it can help investors understand whether the market price of a company seems reasonable to its balance sheet.
- Please note that high growth companies will often show the price to book ratios well above 1.0 whereas companies facing problems will occasionally show ratios below 1.0
- The Return on Equity is expressed as a percentage.
- The average of the S&P 500 is 14%.
- It is important to compare apples with apples so do not compare the ROE of a bank and an oil company as it does not make sense.
- It is quite simple to calculate the dividend yield. Do you reckon the higher the yield the better? Be careful! It might well be a sign of weakness!
- The dividend Pay Out Ratio is a useful tool to get an idea of the distribution of the dividend related to the net income of the company, but only for companies with more or less the same profile.
- Enterprise Value/EBITDA is also known as the Enterprise multiple.
- The ratio is used to determine the value of a company.
- How to interpret Enterprise Value/EBITDA ratio and how to apply it.