Looking at finance metrics of a stock!

Hella fellows!

This is one of my fav articles – I can use this article as a guide for myself and is intended for knowledge purposes. Most of these factors are generally considered to be basic finance metrics before buying a stock. I am not gonna explain mathematics here but will try to give you a bigger idea behind these metrics. The order in which these metrics listed are random. Let’s break it into two articles for keeping a decent size.

You can go through this article for a brief understanding of stocks, I would recommend reading this first if you are new to the stock market.

We can all these numbers right away from any finance website like yahoo finance or google finance. These definitions are purposely kept naive for understanding. There are super detailed informational articles already available on many popular finance websites like Investopedia.

Market Capitalization:

Easy-peasy definition: This is one of the simple metrics generally called a market cap, which shows how big the company is (or) how the public values it. Simply put, it is the product of all shares of a company by its value (stock price). This value represents how much the public is ready to pay for that stock, the higher the market cap – the bigger the company is.

Note: Beware some company stocks are inflated purposely, which leads to increased market cap – though the company doesn’t really have actual business in hand. Simply, it doesn’t reflect the actual value of a company.

Enterprise Value:

Easy-peasy definition: Enterprise value is the measure of a company’s total value, generally considered as actual value as it accounts for debts and liquid cash. It’s generally called the value to take over a company. EV is calculated as:

Enterprise Value = Market Capitalization + Total Debt – Cash

To put it simply – Pay everyone who owns a share in the company (market capitalization) + Debt (total money owed) – Cash (Existing liquid cash in the company).

Earnings per share:

Easy-peasy definition: As the name says – it is earning per share. You know what is a share/stock (number of shares of a company). You know what is earnings (or) simply profits. Just divide them – you will know how much profit a share of the company is. The higher the EPS, the more profitable the company is.

Note: EPS is an indication that how well the company is doing with all of the shareholder’s money. That doesn’t mean shareholders will receive that money per share.

Price-to-Earning (P/E) Ratio:

Why do we need it: Stock prices are what people are ready to pay. If more people wanna buy, the higher the stock price is. In that case, how do you know – when a stock price is over-valued or under-valued? Looking at other company stocks? That’s not a fair comparison for obvious reasons. That’s where the P/E ratio comes to the rescue.

Easy-peasy definition: Price-to-earnings ratio is – the current stock price divided by earnings per share(EPS). We know the stock price – we know how much it is earning per share. Just divide these two figures – you will know the value of P/E.

Note: Sometimes higher P/E also means – stockholders have higher expectations of the company which can be the reason for over-valuation like Tesla has crazy P/E value.

Dividend yields and rate:

Easy-peasy definition: Dividend (or dividend rate) is what the company pays out to you per share from their earnings (generally announced every quarter). This value is decided by the company board of directors. The dividend yield is nothing but dividend per share (dividend/share price) – if they decide the dividend as 2$ and the stock price is 100$ – the dividend yield is 2%.

Why companies give dividends: There are multiple answers to this question depending on the company. Generally, they are paid to shareholders as a reward for purchasing their shares. Companies that became large enough will distribute some of their earnings in form of dividends.

Note: Lower dividend value doesn’t mean that the company is performing badly. Rather, the company might have decided to invest those dividends into new revenue-generating sources which can result in an increased value of the company in the future.

Return on Equity (ROE):

Intro: Equity is the portion of the company owned by the investors. Generally, this ownership is distributed through stocks. So, shareholders equity is the portion of the company owned by shareholders. How do we calculate it?

Shareholders equity = Total Assets of Company (like cash, equipment, inventory) – Total Liabilities (like Debt, Income tax, bills)

But why: Shareholders’ equity is used to calculate the return on the investment. Once we know this exact value of how much shareholders own in the company – we can use it to determine how returns are on the equity accumulated – which is nothing but Return on Equity (ROE)

Return on Equity = Net Income of a Company /Shareholders Equity

Note Higher the return on equity, the better the company is. Usually, the ROE of a company is compared with the business sector average (like Microsoft’s ROE will be compared with the Technology sector) – if that company maintains the average or more than the average – it got a solid return on equity.

In order to make our life easy, I am trying to build a tool – that would give us all these figures once we provide company name/ticker. Including the github link here, but lot of work is yet to be done – https://github.com/ManidharVutla/Stock-Info

That’s it for this article! Just sit back and invest!