MODULE 3 | LESSON 31:

How To Calculate Stock Terms

LESSON SUMMARY

In this lesson, we review all the important stock terminology we’ve learned throughout the website. This lesson’s purpose is to provide a location where you can reference all the terms and understand how the terminology is calculated. Learning all the lingo in investment can be a challenge. For this reason, The Neatest Little Guide To Stock Market Investing by investment journalist Jason Kelly, is the number one resource for many stock investors. With this book you get a simple and strong building block to your investment skills. By following the link, you can see third party reviews for Jason’s book on Amazon. It’s a very good guide and I’ve personally read it.

Below is a list of all the terms described in the video with times in the video where you can access the information. For example, if you wanted to watch only the information pertaining to the P/E ratio, you would move the video timeline bar to 6:47.

STOCK TICKER TIME-WARP LOCATION

LESSON VOCABULARY

Shares Outstanding

Shares outstanding refer to the number of shares that are held by all the stockholders of the company. If there are 100 outstanding shares and you own 1 share, you own 1% of that company. Shares outstanding are reported numbers that require no calculation.

Earnings per Share (EPS)

Knowing how much money a company makes it very neat, but as a shareholder it is often more important to know what the earnings are on a per share basis. The reason is that as a shareholder, you are being rewarded according to your level of ownership. The key ratio is calculated as Net income / Shares outstanding.

Diluted EPS

Diluted EPS is very similar to EPS. The difference occurs when companies reward employees with stocks. More stocks mean that the ownership, including the earnings becomes diluted. Therefore, Diluted EPS is therefore a more accurate measure to use than normal EPS. It is calculated as: Net income / Diluted average shares.

Price to Earnings (P/E)

The Price to Earnings or P/E is a very commonly used key ratio to indicate the price level of a stock. For instance, a P/E of 18 means that $18 is the cost of $1 earnings a year later. It is calculated as: Stock price / EPS

Stock Volume

Stock volume is the number of shares of a given stock that are being traded on a daily basis. This number is reported, and therefore, it doesn’t come with a formula.

Dividend Rate

The dividend rate is dependent on how much the management has decided to pay out as a dividend. For example, if a company decides to pay out $1 in dividend per share, the dividend rate is $1.

Dividend Yield

The dividend yield indicates the size of the return an investor can expect to gain at the current price. If the stock price is $100 and each stock pays off $3, the yield is 3%. Often, this is simply reported as 3 with no percentage sign, but in any case, that is how it should be interpreted. It is calculated as: dividend rate / stock price.

Debt/Equity Ratio

The Debt/Equity ratio compares the amount of debt the company has incurred when compared to the equity of the company. The equation is very simple to remember: Debt / Equity.

Book Value

The book value number is sometimes known as the equity per share. What that number tells you as an investor, is if all the company’s assets were being liquidated and all debt was paid off, this is the cash you would be left with. The formula: Equity / Shares outstanding.

Price/Book Value (P/BV)

Stocks are typically not priced at book value. Investors can be willing to pay a much higher price for an asset – like a patent – than what you can read from the books. Typically, the reason for this is that the investor deems high earnings potential or because it is considered a safe company. What the investor can take away from this number is a snapshot of the margin of safety. For instance, if a stock that’s trading at a high P/B is considerably above 1.5, there is often very little margin of safety. Warren Buffet would want to omit this too and in other words, the stocks may be overpriced. Formula for P/BV: Stock price / Book value.

Equity Growth

The equity growth measures the book value growth per share over a given time period. The BuffettsBooks.com intrinsic calculator can help you calculate that number using book value inputs over your desired period of investigation.

Return on Equity

Any investor would want the Return on Equity ratio to be as high as possible, stable and increasing. Since the equity is the shareholders money, the ROE is a measure of how well the shareholder’s money is reinvested in the business. The formula for ROE is: Net income / Equity

Current Ratio

The current ratio indicates the amount of cash the company can expect to convert over the next 12 months. It also includes the amount of cash the company is expected to pay out over the same time period. Current ratio is calculated as: Current assets / Current liabilities.