Finance Stock Formulas

Understanding stock formulas is crucial for informed investment decisions. These calculations help assess a company’s financial health and potential profitability.

Earnings Per Share (EPS)

EPS indicates a company’s profitability on a per-share basis. A higher EPS often signals greater profitability.

Formula: EPS = (Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding

Example: If a company has a net income of $1 million, pays $100,000 in preferred dividends, and has 500,000 common shares outstanding, the EPS would be ($1,000,000 – $100,000) / 500,000 = $1.80 per share.

Price-to-Earnings Ratio (P/E Ratio)

The P/E ratio compares a company’s stock price to its earnings per share. It suggests how much investors are willing to pay for each dollar of earnings.

Formula: P/E Ratio = Market Value Per Share / Earnings Per Share (EPS)

Example: If a company’s stock is trading at $36 and its EPS is $1.80, the P/E ratio would be $36 / $1.80 = 20. A high P/E ratio might indicate overvaluation or high growth expectations.

Dividend Yield

Dividend yield represents the annual dividend payment as a percentage of the stock’s price. It reveals the return on investment through dividends alone.

Formula: Dividend Yield = (Annual Dividends Per Share / Price Per Share) * 100

Example: If a company pays an annual dividend of $1 per share and its stock price is $50, the dividend yield would be ($1 / $50) * 100 = 2%.

Debt-to-Equity Ratio

This ratio measures a company’s total debt relative to shareholder equity. It shows the proportion of a company’s financing that comes from debt versus equity.

Formula: Debt-to-Equity Ratio = Total Liabilities / Shareholder Equity

Example: If a company has total liabilities of $5 million and shareholder equity of $10 million, the debt-to-equity ratio would be $5,000,000 / $10,000,000 = 0.5. A higher ratio could suggest a higher risk of financial distress.

Return on Equity (ROE)

ROE measures a company’s profitability relative to shareholder equity. It indicates how efficiently a company is using shareholder investments to generate profits.

Formula: ROE = Net Income / Shareholder Equity

Example: If a company has a net income of $2 million and shareholder equity of $10 million, the ROE would be $2,000,000 / $10,000,000 = 0.2 or 20%. A higher ROE generally indicates better performance.

These formulas are valuable tools for analyzing stock investments, but remember to consider them in conjunction with other financial metrics and qualitative factors when making investment decisions.