Evaluating Companies

Research: Products Earnings Debt Performance Consider: PROFITABILITY GROWTH POTENTIAL VALUATION

Net Earnings Gross sales minus taxes, interest, depreciation, and other expenses. Net earnings are one of the most important measures of a company's performance, since the pursuit of earnings is the primary reason companies exist. Sometimes net earnings includes one-time and extraordinary items, and sometimes it does not. also called net earnings or net income or bottom line. Gross salestaxesinterestdepreciationexpensesNetearningscompany'sperformance companiesextraordinary itemsnet income bottom line Gj9 Gj9

EPS and PE Ratio Earnings per Share (EPS) Company’s Earnings 2,000,000 Outstanding Shares 1, 000,000 P/E Ratio = 5 Price per share $10 Earnings per share $ 2 price/earnings ratioprice/earnings ratio. The most common measure of how expensive a stock is. The P/E ratio is equal to a stock's market capitalization divided by its after-tax earnings over a 12-month period, usually the trailing period but occasionally the current or forward period. The value is the same whether the calculation is done for the whole company or on a per-share basis. For example, the P/E ratio of company A with a share price of $10 and earnings per share of $2 is 5. The higher the P/E ratio, the more the market is willing to pay for each dollar of annual earnings. Companies with high P/E ratios are more likely to be considered "risky" investments than those with low P/E ratios, since a high P/E ratio signifies high expectations. Comparing P/E ratios is most valuable for companies within the same industry. The last year's price/earnings ratio (P/E ratio) would be actual, while current year and forward year price/earnings ratio (P/E ratio) would be estimates, but in each case, the "P" in the equation is the current price. Companies that are not currently profitable (that is, ones which have negative earnings) don't have a P/E ratio at all. also called earnings multiple.expensivestockratiostock'smarket capitalizationafter-taxearnings periodtrailingforwardvaluesamecalculationcompanyshare priceearnings per sharemarketpaydollarannualCompaniesratiosinvestmentsvaluableindustryactualpriceprofitablenegativeearnings multiple

Overvalued and Undervalued Must compare within industries and based on company news. High P/E could mean more promising or overvalued. Low P/E could mean failing or undervalued.

ROE AND ROA How efficiently is the money being used? What is the income as a percentage of assets? Includes debt What is the income as a percentage of the capitalization? Does not include debt Percentage varies by industry—keep in mind when comparing Return on assets measures a company’s earnings in relation to all of the resources it had at its disposal (the shareholders’ capital plus short and long-term borrowed funds). Thus, it is the most stringent and excessive test of return to shareholders. If a company has no debt, the return on assets and return on equity figures will be the same.return on equity

Debt-to-Equity Ratio Debt divided by outstanding shares. The higher the debt-to-equity ratio, the more leveraged the company. To evaluate, compare within industry and based on company news.