Using ratios to predict positive investment returns Picking a stock Using ratios to predict positive investment returns

The P/E ratio divides a stock's share price by its earnings per share P/E = Price to Earnings Best-known fundamental stock ratio, it's also one of the most valuable. The P/E ratio divides a stock's share price by its earnings per share

P/E Ratio Advantages: Provides a measuring stick to compare valuations across companies. A stock with a lower P/E ratio costs less per share for the same level of financial performance than one with a higher P/E. One thing to make sure: Only use P/E to compare companies within the same industry Example: Telecom stocks usually have P/E in the low teens, but high tech stocks can have P/E of 40 or more!

Earnings per share Earnings Per Share (EPS) is a yearly metric Formula for EPS: Net Income – Preferred Dividends # of Shares

Other Ratios Price-to-Book A Stock’s share price divided by net assets Debt-To-Equity Similar to the Debt-to-Equity ratio we learned for personal finance situations Gives a picture of overall long-term financial health of the company Free Cash Flow Shows how much liquid cash a company has. Allows investors to see through creative accounting profit reporting

Other things to Think about When Picking a Stock You may want to follow Warren Buffet’s rules for investing Only invest in companies with a clear, easy to understand business model Examples: McDonald’s, Starbucks, etc Don’t invest in risky picks in industries that you are not an expert in Follow “Best-in-Breed” strategy. Example: Coca-Cola, Home Depot, etc Invest in blue-chip stocks that have just experienced a downswing