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

2. 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

3. 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!

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

5. 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

6. 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