Stock Market Terms

#Earnings Per Share (EPS)

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Earnings Per Share (EPS) represents the portion of a company's earnings, net of taxes and preferred stock dividends, that is allocated to each share of common stock. The figure can be calculated simply by dividing net income earned in a given reporting period (usually quarterly or annually) by the total number of shares outstanding during the same term, a weighted average is typically used Because the number of shares outstanding can fluctuate.

For Example:

Let us assume leonix Technologies PVT LTD has

Company Net Income: 40,000,000/-

During the same time

Number of Share: 100,000,000

EPS (Earning Per Share) =Company Net income/Number of Share

                                           =40,000,000/100,000,000

                                           =0.4/-

EPS is a carefully scrutinized metric that is often used as a barometer to gauge a company's profitability per unit of shareholder ownership. As such, earnings per share is a key driver of share prices. It is also used as the denominator in the frequently cited P/E ratio.

Though earning per share is widely considered to be the most popular method of quantifying a firm's profitability, it's important to remember that earnings themselves can often be susceptible to manipulation, accounting changes and restatements. Nevertheless, earnings per share remains the industry standard in determining corporate profitability for shareholders.

#Price-to-Book Ratio (P/B)

The price-to-book ratio measures a company's market price in relation to its book value. The ratio denotes how much equity investors are paying for each dollar in net assets.

Book value, usually located on a company's balance sheet as "stockholder equity," represents the total amount that would be left over if the company liquidated all of its assets and repaid all of its liabilities.

[Note: EQUITY=ASSET-LIABILITIES]

EXAMPLE:

Assume that the stock of Leonix technologies Pvt Ltd is trading at $6 per share and there are 100 shares outstanding.

Balance Sheet for Leonix technologies Pvt Ltd: 

Assets  
Cash                                       1,000
Accounts Receivable                 500
Inventory                                    500
Total Current Assets               2,000

Liabilities 

Long Term Debt                        500 
Accounts Payable                     500
Current Long-Term Debt           500
Total  Liabilities                       1,500
Total Liabilities                       1,500

Owners' Equity:                         500(Asset-Liabilities)

P/B ratio =  Stock Price / Book Value per share

Book value:  2,000 - 1,500 = 500 (note that this is the same as owners' equity)

Book value per share:  500 / 100 = $5

P/B ratio = $6 / $5 = 1.2

A P/B ratio of less than 1.0 can indicate that a stock is undervalued, while a ratio of greater than 1.0 may indicate that a stock is overvalued.

The price-to-book ratio indicates whether or not a company's asset value is comparable to the market price of its stock. For this reason, it can be useful for finding value stocks. It is especially useful when valuing companies that are composed of mostly liquid assets, such as finance, investment, insurance, and banking firms.

The price-to-book ratio is not as useful for firms with large R&D expenditures or firms with high levels of property or other fixed assets. Since long-term assets are held on the balance sheet at the original cost, if market prices of those assets increases or decreases dramatically, book value can differ dramatically from market value.

Like most ratios, it's best to compare P/B ratios within industries. Tech stocks, for example, often trade above book value while financial stocks often trade below book value.

#P/E Ratio

The price-to-earnings ratio (P/E) is a valuation method used to compare a company’s current share price to its per-share earnings.

EXAMPLE:

The market value per share is the current trading price for one share in a company, a relatively straightforward definition. However, earnings per share (EPS) may not be as intuitive for most investors. The more traditional and widely used version of the EPS calculation comes from the previous four quarters of the price-to-earnings ratio, called a trailing P/E. Another variation of the EPS can be calculated using a forward P/E, estimating the earnings for the upcoming four quarters. Both sides have their advantages, with the trailing P/E approach using actual data and the forward P/E predicting possible outcomes for the stock. Calculated as the following;

Price-to-Earnings Ratio (P/E) = Market value per share / Earnings Per Share (EPS)

Suppose company XYZ that currently trades at $100.00 and has an earnings per share (EPS) of $5.00. Using the previously mentioned formula, you can calculate that XYZ’s price-to-earnings ratio is 100 / 5 = 20.

The price-to-earnings ratio is a powerful, but limited tool. For investors, it allows a very quick snapshot of the company’s finances without getting bogged down in the details of an accounting report.

Let us use our previous example of XYZ, and compare it to another company, ABC. Company XYZ has a P/E of 20, while company ABC has a P/E of 10. Company XYZ has the highest P/E ratio of the two and this would lead most investors to expect higher earnings in the future than from company ABC (which possesses a lower P/E ratio).

As noted earlier, the P/E ratio is limited. It does not paint the entire picture for the potential investor; rather it is a complementary tool in your financial toolbox. Be wary of forward EPS measures, (remember, EPS is an essential aspect of calculation of the P/E ratio) as they are matters of prediction and are only estimates of projected earnings. Further, trailing P/E ratios can only tell you what happened to a company in the previous time periods.

#Net worth Per Share

Net worth is the amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by annual operating losses or a substantial decrease in asset values relative to liabilities. In the business context, net worth is also known as book value or shareholders' equity.

Consider a couple with the following assets - primary residence valued at $250,000, an investment portfolio with a market value of $100,000 and automobiles and other assets valued at $25,000.Liabilities are primarily an outstanding mortgage balance of $100,000 and a car loan of $10,000.

The couple's net worth would be therefore be $265,000 ([$250,000 + $100,000 + $25,000] - [$100,000 + $10,000]).

Assume that five years later, the couple's financial position is as follows - residence value $225,000, investment portfolio $120,000, savings $20,000, automobile and other assets $15,000; mortgage loan balance $80,000, car loan $0 (paid off). The net worth would now be $300,000. 

In other words, the couple's net worth has gone up by $35,000 despite the decrease in the value of their residence and car, because this decline is more than offset by increases in other assets (such as the investment portfolio and savings) as well as the decrease in their liabilities.

If Net Worth per Share increases over time:

An increasing Net Worth Per Share value is a positive sign, as this may often be a signal the company has reduced its liabilities. The company may also have gone through a stock buy-back plan, reducing the number of shares, essentially making the net worth for each share more valuable.

If Net Worth per Share decreases over time:

A decreasing or negative Net Worth Per Share value is a negative sign, showing the company’s liabilities may exceed its ability to pay them. Companies that distribute a large amount of Stock Dividends may also see this ratio value suffer, as it is burdened with constant dividend disbursements.

If Net Worth per Share stays the same over time:

An unchanged Net Worth Per Share value may indicate the company’s net worth for each share of stock has remained the same.

#ROE (Return of Equity)

Return on equity (ROE) is the amount of net income returned as a percentage of shareholder’s equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity

#ROA (Return of Asset)

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment”. Sometimes it is also called Return of investment. (ROI)

The formula for return on assets is:

Return On Assets (ROA)=Net income/Total Asset