So, you’re browsing through the internet to find out the latest happenings in the world of stock trading and you find some investment analysts talking about the “X” times earnings. The X there refers to any number and it usually represents the earning power of a particular company.
These things are not well known to the layman, but it is actually interesting to know about these things, especially if you’re going to be a stock market trader one day among the best stock exchange firm in Malaysia.
So in this article, I will talk about what that earning power really is by explaining some of the most common terms.
The EPS stands for Earnings Per Share and it has a specific formula that anyone can use to find out a company’s EPS.
The formula is the company’s net income (assuming the taxes have been deducted) – the dividend payments allotted for the preferred stocks / common shares outstanding (which is just all of the stocks currently held by all of the shareholders).
Let’s put that formula in action. Suppose that you have 8 million net earnings this year and your preferred stock dividends price is 2 million. You subtract that from the company earnings and you get 6 million. Let’s say that the common shares outstanding is at 3.5 million. Divide that number with the 6 million that is left after deducting the preferred stocks price and you are left with 1.74 price per common share.
This data is actually ubiquitous in the stock exchange and is prominently displayed in the terminal points for easy viewing.
This is probably the standard metric when it comes to the stock trading. The Price/Earnings Ratio is simply the ratio between the company’s share price divided by the company’s EPS.
Suppose that the price per share of a particular company is at $50 and we’ll base it from the EPS that was calculated above, then it would look like this: 50/1.74= 28.7 ~ 29. So the company’s PE/Ratio is 29. This number is a little bit high, but for the purposes of this article, I’ve just shown you how it’s calculated.
The P/E ratio is sometimes referred to as the company’s Earnings Multiple.
Also known as the Dividend Yield, is just the inverse of the P/E ratio for each unit of the company’s common stock. For instance, 1/29 based on our example is 0.03. To get the percentage, we would just multiply the answer by 100, so in this case, it would be 0.03 x 100= 3%.
The company’s Preferred stock is just a type of company ownership with more privileges and assets compared to a common stock. A common stock, in essence, is just a representation of ownership in a company (without the privileges one would avail by getting preferred stocks).
It is, therefore, mandated by law that shareholders that have preferred stocks be paid first (dividends) before the common shareholders.
That is also precisely why preferred stock payments are factored in when it comes to the company’s Earnings Per Share (EPS).