P/E Ratio

• P/E ratio = current share price / E.P.S., where E.P.S. is earnings per share• For example, suppose that a company is currently trading at $43 a share and its earnings over the last 12 months were $1.95 per share. The P/E ratio for the stock could then be calculated as 43/1.95, or 22.05.• Price per earnings ratio values a company.• It is the dollar amount an investor can expect to invest in a company in order to receive one dollar of the company’s earnings.

P/E Ratio

• The average market P/E ratio is 20-25.• A high P/E ratio means investors are anticipating higher growth in the future.• A low P/E ratio could indicate that a company is currently undervalued or the company is doing exceptionally well relative to its past trends.• Companies that have no earnings or are losing money do not have a P/E ratio (N/A).

Limitations of a P/E Ratio

• Valuations and growth rates of companies may often vary wildly between sectors.• One should compare companies P/E ratios within the same sector.• Leverage or debt can skew P/E ratios.• A company with more debt will likely have a lower P/E ratio than a company with less debt.• However, if business is good, the one with more debt stands to see higher earnings because of the risks it has taken.

P/E Ratio Video

http://www.investopedia.com/terms/p/price-earningsratio.asp

E.P.S. Ratio

• The portion of a company’s profit allocated to each outstanding share of common stock.• Serves as an indicator of a company’s profitability.• E.P.S. = (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares

E.P.S. Ratio

• Considered to be the single most important variable in determining a share’s price.• Major component used to calculate P/E valuation ratio.

Limitations of E.P.S. Ratio

• Two companies can generate same net income with different equity (investment).• The company that generates it with less equity is more efficient at using capital.• Investors need to be aware of earnings manipulation.

E.P.S. Video

http://www.investopedia.com/terms/e/eps.asp

Income Statement• Also known as the "profit and loss statement" or "statement of revenue and expense.“• A financial statement that measures a company's financial performance over a specific accounting period.• Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities.• It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.

Income Statement

• Operating items section is interesting to investors and analysts alike because this section discloses information about revenues and expenses that are a direct result of the regular business operations.• Non-operating items section discloses revenue and expense information about activities that are not tied directly to a company's regular operations.• For example, the sale of a factory and old plant equipment.

Income Statement Video

http://www.investopedia.com/terms/i/incomestatement.asp

Balance Sheet

• A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time.• These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.• The balance sheet adheres to the following formula:

Assets = Liabilities + Shareholders' Equity

Balance Sheet• A company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholders' equity).• The balance sheet represents the state of a company's finances at a specific moment in time.• It does not give a sense of the trends that are playing out over a longer period.• The balance sheet should be compared with those of previous periods.• It should also be compared with those of other businesses in the same industry, since different industries have unique approaches to financing.

Balance Sheet Video

http://www.investopedia.com/terms/b/balancesheet.asp

Cash Flow Statement

• Records the amounts of cash and cash equivalents entering and leaving a company.• Allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent.• Even profitable companies can fail to adequately manage their cash flow, which is why the cash flow statement is important: it helps investors see if a company is having trouble with cash.

Cash Flow Statement Video

http://www.investopedia.com/terms/c/cashflowstatement.asp

10-Q Report• A comprehensive report of a company's performance that must be submitted quarterly by all public companies to the Securities and Exchange Commission.• Companies are required to disclose relevant information regarding their financial position.• The form must be submitted on time.• The 10-Q is due 35 days (it used to be 45 days) after each of the first three fiscal quarters. There is no filing after the fourth quarter because that is when the 10-K is filed.• Information should be available to all interested parties.

10-K Report

• A comprehensive summary report of a company's performance that must be submitted annually to the Securities and Exchange Commission.• Typically contains much more detail than the annual report.• Includes information such as company history, organizational structure, equity, holdings, earnings per share, subsidiaries, etc.• Must be filed within 60 days (it used to be 90 days) after the end of the fiscal year.