COPYRIGHTED MATERIAL
SLIDE 15I
E Yld % The term yield is frequently used in connection with all kinds of investments. It has slightly different meanings depending on the type of financial instrument. With regard to stock, yield is the cash return on the share, expressed as a percentage of the stock’s current market value . Yield is calculated by dividing the stock’s dividend by its per share price. So, if the HnnH dividend is 28 cents and it’s current share price is $15.25. Divide .28 by $15.25 ( ). The yield is 1.83%. Yields are compared stock to stock, sector to sector, etc. to determine value. Engage students in a discussion. Put on your investor thinking caps. Let’s compare HnnH’s yield to another stock’s yield to determine which has the best value based on yield? Let’s say the other stock is more expensive at $29.10 per share, but has a dividend of 52 cents. Which stock has the better yield? Answer: HnnH’s yield is 1.83%. The other stock’s yield is 1.78% ( ). With regard to yield, these investments are of similar value. F EPS This means Earnings Per Share . It is the portion of a company's profit allocated to each share of stock . Analysts and investors like to know, not just how much profit a company makes, but how much of that profit is allocated to each share . It is just another way to compare value. To calculate EPS, a company’s net profit is divided by the number of shares outstanding . For example, if a company has a net profit of $3,000,000 and has 20,000,000 shares outstanding, the EPS is 15 cents ( ). Engage students in a discussion: Recall from lesson 7, Commerce Hearts Capitalism, that profit is the money a business makes after all its costs and expenses are paid. If a corporation has a profit of $10,000,000 and has 70 million shares outstanding, what is its EPS? (Answer: = 14.2 cents per share) . Generally, the higher the EPS, the higher the value of the shares. G P/E This means price/earnings ratio . It is the ratio of the company’s per share price to its per share earnings (EPS) . P/E ratios are an important and popular means of comparing the values of stocks. P/E ratios are calculated share price/EPS. For example, if a share of a company is priced at $35.25, and its earnings per share (EPS) are $1.25, the P/E ratio is 28 ( = 28) Another common way of stating it is that its “shares are selling at 28x earnings.” Often the price of a stock will be high in spite of the company’s low earnings. In that case, the stock will have a high P/E ratio . In some industries, such as the tech industry, stocks often have very high P/E ratios. Some even sell at over 100 times EPS! What’s up with that? A high P/E ratio may indicate a future earnings increase is expected, such as a company with new and novel products in its pipeline, and that investors are enthusiastic about the company. Sometimes a stock’s price is low , while the company’s earnings are high . In that case the P/E ratio will be low. A low P/E might imply that the stock is underpriced, or that the company or industry is not expected to perform well, and that investors are less enthusiastic about the shares. P/E ratios are a very useful means of comparing values of stocks. Average P/E ratios vary between industries . What is considered a high ratio in one industry may be low for another. .28 $15.25 .52 $29.10 $3M $20M = 15 cents $10M $70M $35.25 $1.25 PRODUCT PREVIEW
Lesson 15 | Walk’n on Wall Street 288
Made with FlippingBook flipbook maker