Tag Archives: Earnings per share

Dividend payout ratio (DPR)

Not so many investors talks about this metrics and DPR is considered to be a tedious measurement. It looks like an important measurement, but nobody know why. DPR measures what a company pays out to investors and money makers in the form of dividends.

You can calculate like this:

DPR = Dividends Per Share / EPS

Let`s say Company A have paid out $2 per share in annual dividends and they had $3 in EPS, the DPR is 66%. ($2/$3=66%). Younger companies have lower payouts or no dividends at all, than the older one.

The companies that is older do business in mature industries that is still growing and therefore can pay out higher dividends which is the best use of their profits. But again, you cannot look on this measurement isolated, but in relationship to other tools and in context of the company`s industry.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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Price-to-earnings growth (PEG)

PEG ratio is used to determine the value of the stock while you look at the company’s earnings growth. This gives you a better picture and overview than P/E ratio. Take a look at LinkedIn. Price-to-earnings is just below 1000 now.

A high P/E like that may look like a good buy, but factoring in the company`s growth rate to get the stock`s PEG may tell you another story. A company with a lower PEG ratio may be undervalued given its earnings performance.

The PEG ratio tells you whether the stock is over or underpriced and that varies by industry and what kind of business it is. The accuracy of the numbers in the PEG depends on all the inputs used. If you use historical growth rates, you may provide an inaccurate PEG ratio because the future growth can deviate from historical growth rates. Some use the terms “forward PEG” and some use the terms “trailing PEG” to distinguish between the calculation methods using future growth and historical growth.

The most popular way to compare two different stocks are to look at the P/E. You simply calculate it by taking the current price of the stock and divide it by the EPS. It tells you whether the stock is high or low relative to its earnings.

A stock with a high P/E is often considered as overpriced and that is probably right. It signals that the traders have pushed the stock price too high and above any reasonable near term growth that is probable.

However, a high P/E can also signal a strong vote of confidence that the company still has strong growth prospects in the future. This tells us that the stock price can go even higher.

Investors are usually more concerned about the future than the present. That`s why it is better to look at future earnings growth or the PEG ratio. You calculate the PEG by taking the P/E and dividing it by the projected growth in earnings.

PEG = P/E ratio / (projected growth in earnings)

For example:

P/E in Company A is 100, and projected earnings growth next year is 20%. PEG in this case is 5 (100 / 20 = 5). Like all other ratios, the number five in this case is just a number you can compare in relationship to others. The lower the number, the less you pay for each unit of future earnings growth. A company with a high P/E and a high projected earnings growth may be a good value.

A company that is not growing any more with a P/E of 10, and a low or no projected earnings growth, gives you a PEG like the P/E. This can tell you that the investment in here is very expensive.

Take a look at the chart below. I have compared Sony with Starbucks. People are not buying vinyl records or cd`s anymore. What do they buy? They simply buy coffee! Sony traded at $120 in year 2000, and now the stock is just below $20. By the way, do you know what company that is selling most cd`s in this world right now? Belive it or not; it is Starbucks!

SNE and SBUX

News today:

Core CPI & Retail Sales at 8:30am,

Existing Home Sales & Business Inventories at 10:00am,

Crude Oil Inventories at 10:30am,

Fed Meeting Minutes at 2:00pm.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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Earnings per share (EPS) 2

EPS is considered to be the single most important variable in determining a companies share price.

Definition:

The portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability.

The most important thing in finance is “time”. When are the transactions going to be paid? That`s because the world it changing, so are the currency and the value of the money.

So, it is very important to compare apples to apples. Otherwise, it will be difficult to make an investment decision. It`s meaningless to compare the price of two different stocks.

It doesn`t make sense to compare the earnings of two different companies either. Why? Because, like I said in my article: “Earnings per share 1”, all the companies have different number of outstanding shares. This is important to know.

Let`s say Company Company A and B both earn $1000, but Company A have 10 shares outstanding and Company B have 100 shares outstanding. See? What company do you want own?

It`s better to compare two different companies by looking at the earnings per share (EPS). A simple tool to use. You calculate earnings per share by taking the net earnings and divide it by outstanding shares.

EPS = Net Earnings / Outstanding shares

In our example, Company A had earnings of $1000 and 10 shares outstanding. EPS for Company A is 100. (1000/10=100).

Company B also had earnings of $1000 but 100 shares outstanding. EPS for Company B is 10. (1000/100=10).

Wow! Buy shares in Company A you say. Maybe, but it is not enough to make that decision only on the basis of its EPS. It`s helpful to compare two companies, assuming they are in the same business, but it doesn`t tell you whether it`s a great stock or not. It doesn`t tell you what the market think of the stock either. We need to look at some ratios.

Keep in mind that there are three types of EPS:

Trailing EPS – last year’s numbers (the only actual EPS)

Current EPS – this year’s numbers (still projections)

Forward EPS – future numbers (obviously projections)

I have tried to make this as easy as possible, but if you want, we can make it more difficult. We need to remember diluted shares, dividende, warrants and so on. I am not gonna write about that today, so hang on, we will discuss that later. I just don`t want to complicate it now.

News today: FED Chairman Ben Bernanke speaks today at 7:00pm.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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Earnings per share (EPS) 1

Don`t look at only the price of the stock. That is not enough. A stock that is priced at $30 can be cheaper than a stock priced at $10. Some people tend to think that a stock price reflects the value relative to other stocks, but that is terribly wrong!

The price of the shares is completely meaningless to investors that is doing fundamental analysis. The market cap is found by multiplying the per-share price times the total number of outstanding shares. This number gives you the total value of the company or stated another way, what it would cost to buy the whole company on the open market.

The per-share price is changing all the time, and that is why we aren`t so concerned about it. All the companies have a different number of outstanding shares, and that doesn`t tell us what the value of the company is. What we are looking for are the market capitalization (market cap).

You can find the market cap by multiplying the per-share price times the total number of outstanding shares which means what investors need to pay for the whole company on the open market.

Let`s say the stock price is $5. Outstanding shares: 10 million. The market cap is $5 x 10 000 000 = 50 000 000. But, what if Company B have a stock price of $2 and outstanding shares is 100 000 000? Market cap is $200 000 000. So, what company do you want`t own? Stock price $5 or $2?

Do not only look at the per-share prices because it doesn`t tell much. Look for a stock compared to another stock that is similar in the same business. Market cap gives you a better picture of the companys value, and the market put the stocks into three categories:

Small Cap under $1 billion

Mid Cap $1 – $10 billion

Large Cap $10 billion+

The most important thing is to understand the comparing companies of similar size in the same business when you are doing your evaluation. Market Cap is better than evaluating per-share price of a stock. How do you find earnings per-share? I will write more about that next week.

News today: Empire State Manufacturing Index & Import Prices at 8:30am, Capacity Utilization Rate & Industrial Production at 9:15am.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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Price to earnings 2

Margin of safety is very important. It seems to be like that the human psychology is apt to go too far sometimes and it can all end up to throw rational valuation out of the window.

You know that price-to-earnings for Facebook is 12, and 13 for Twitter, and if you are paying more than 15 times the earnings for a company, you need to seriously examine the underlying assumptions you have for the companies profit in the future, and its intrinsic value.

I have seen many stocks trading with much more than 12 and 13x earnings, and if you have bought some of them at that price you would have crushed other investments because the underlying prifits did live up to Wall Streets expectations.

But who is investing in a risky business if they don`t know the business they are in? Do you feel confortable if you have all your money in a risky stock like that if you don`t know the demand, competitors, future drivers and the commodity nature of their product? The company can be wiped out, so does your money, but probably not.

The ideal situation is when you get a great business out of your investments and generates huge amount of money with little capital investments. Sometimes you get a huge profit at a steep discount to intrinsic value. How about Wells Fargo, trading at 5x earnings during the real estate crash 23 year ago?

You have to predict the future and try to imagine how the future will be for the company. How is it today, tomorrow, next year and how does it look in 10 years? Is this business going to grow? Will it be a huge demand for their products? Are they competetive? What about their earnings and profit in the future? Is there any threats?

I know a great company. They are selling cd`s and vinyl records. Everybody knows about the company and the price is low. Are you willing to buy shares in this company? Of course not. Selling vinyl and cd`s is not the future and you know that. The future is streaming and broadband. That is where you are going to spend your money.

It is wise to require a much larger margin of safety before you buy some shares in enterprises. The right definition of ‘Price-Earnings Ratio – P/E Ratio is; A valuation ratio of a company’s current share price compared to its per-share earnings. It is calculated like this:

Let`s say company A is currently trading at $50 a share and earnings (EPS) over the last 12 months were $1,95 per share. Then the P/E ratio for the stock should be 25,6. ($50/$1,95). That`s it. Remember that the average market P/E ratio is 20 – 25 times earnings.

EPS (earnings per share) is taken from the last four quarters (trailing P/E). Sometimes the numbers is taken from the estimates for the next four quarters (projected or forward P/E). Other use the last two actual quarters and the estimates of the next two quarters. Often known as “price multiple” or “earnings multiple”.

It will be wrong to compare price-to-earnings in a technology company (high P/E) to a utility company (usually low P/E) as they have a different growth prospects. P/E tells us how much investors are willing to pay per dollar of earnings. P/E for Facebook is 12, which means that the investors is willing to pay $12 for $1 of current earnings.

Avoid basing a decision on this measure alone, because this numbers is usually not enough. the earnings is based on an accounting measure of earnings that is susceptible to forms of manipulation. It makes the quality of the P/E only as good as the quality of the underlying earnings number. Keep in mind that companies that are losing money do not have a P/E ratio.

News today: Trade Balance & Unemployment Claims at 8:30am, Fed Chairperson Yellen Testifies at 10:00am, 30 Year Auction at 1:01pm.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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