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I OWN THAT COMPANY!

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per share, it’s not the only indicator of a stock’s worth. Other factors include: earnings per share, the price-earnings ratio, net asset value per share, and yield.

Return on Equity Return on equity (ROE) is a very important stock measure because it has a direct impact on the company’s growth, profits, and dividends. It shows the overall profitability of the corporation, and seizes how much success the company is having in managing its assets, opera- tions, and capital. The better the ROE, the better the financial condi- tion and position of the firm. Stable or increasing ROEs are good indications. However, stocks with falling ROEs should be avoided.

Earnings Per Share This is the most commonly referred-to indicator of a stock’s value. Whenever you turn on CNBC or look at the stock pages of the Wall Street Journal, there are mentions of earnings per share (EPS). The traditional way to compute this is to find the income of a corporation that is available to its shareholders. This is net corporate profit after taxes and minus any dividends to preferred shareholders. This figure is then divided by the number of outstanding common shares of stock.

For example, XYZ Corporation reports that its net corporate profits (after taxes) are $5.8 million. They must pay $1 million out in preferred dividends. The remaining $4.8 million is divided by the number of XYZ’s outstanding common shares, which is 1.2 million. Thus, their EPS is $4 per share.

$4.8 m $5.8 m $1 m =  = $4/share 1.2 m shares

This method of calculating EPS is called the “basic earnings per share.” It is also known as “trailing earnings per share” because it is based upon the corporation’s reported earnings, which are in the past. Quarterly and semiannual EPS also use this method. However, ana- lysts will also forecast a company’s future earnings and base their EPS on these.

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