Here are Some Formulas to Track the Performance of Your Stocks
In today’s recession-plagued economy, just about everyone’s investments and retirement savings have been hit hard.
To protect our financial well being, we need to be ahead of market performance whenever possible.
The formulas below are used by securities analysts, brokers and others in the investment community, and by company executives, to measure financial performance of companies. They can be used by the rest of us to check on how companies are doing in our challenging global economy and to get a sense of how they may do in the months and years ahead.
Get Financial Statements
To use these measurement formulas, obtain a copy of the latest quarterly and annual financial statements for each of the companies you want to check, and then do the math.
Companies listed on a stock exchange will post financial statements on their websites under ‘investor relations’ or ‘financials’. They will also be posted on the regulators’ websites – for companies listed on stock exchanges in the USA it’s called EDGAR, and for companies listed on Canadian exchanges it’s SEDAR. Privately-held companies may have websites, but these are used mostly for marketing. Their financial information often is not there and difficult to obtain. However, if you are an investor with deep pockets and the company is looking for capital, you could become quite popular among its senior executives.
CF/S: Cash Flow Per Share. Divide the company’s annual cash flow by the number of shares outstanding at fiscal year end. This should be on a fully diluted basis. That means finding and including all warrants granted to buy discounted shares and all stock options granted as employee bonuses or to investors.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. This is a calculation of how much the company earned (or lost) before deducting debt interest, taxes, depreciation and amortization. This is a very popular measure of a company’s financial well being. All the numbers needed are in companies’ quarterly and annual reports; many companies do the EBITDA math for you.
EP/S: Earnings Per Share. Net earnings are divided by the number of shares outstanding to determine Earnings Per Share. Usually this is expressed both as gross EP/S and as fully diluted, i.e., including outstanding stock options and warrants.
E/P: Earnings-Price ratio – the relationship of earnings per share to the current stock price. Also referred to as earnings yield. E/P is used to compare the relative attractiveness of stocks, bonds and money market instruments. It is the inverse of the price-earnings ratio below, which is another popular measure used to determine how appropriately a company’s stock is priced, compared with peer group companies in its sector.
P/CF: Price to Cash Flow. Divide the latest share price by the company’s cash flow per share for the most recent 12-month period. (The lowest number is the best ratio.) Cash flow measures a company’s ability to grow, without feeding upon itself by selling assets. It includes non-cash charges like depreciation, which can be large at times, thus cash flow is considered by many as a better indicator than earnings.
P/BV: Price to Book Value. This is the ratio between a company’s latest closing share price divided by its most recent book value, usually at fiscal year end or the end of a quarter. Book value is net worth per share, and is calculated by totaling up all assets recognized for accounting purposes and subtracting all liabilities. Share prices usually are higher that book value, which demonstrates the stock market’s confidence in the company.
P/S: Price to Sales. The latest closing price divided by the company’s revenues per share for the latest 12 months. (The lowest number is the best ratio.) Sales is more strictly defined than earnings, thus P/S ratios are more constant and reliable than price-earnings ratios. Industries with higher profit margins like oil and gas, and information technology, generally have higher P/S ratios than those with thinner margins, like the retail sector. Regardless, any stock with a P/S ratio of more than two should be considered high risk.
P/E: Price to Earnings. This key measure of a company’s performance is used to compare companies. To get the P/E, divide the latest closing price by earnings per share, fully diluted (all warrants for stocks and stock options included), for the most recent four quarters. Financial markets consider P/E a measurement of investor popularity, i.e., their enthusiasm about/confidence in the company’s potential for future earnings. Some investors believe a low P/E is an indicator of an undervalued stock. A useful indicator but it can be inconsistent – some companies have low P/E ratios as a result of good performance; some have high P/Es due to rapid growth.
In Depth Analysis
The above ratios are convenient ways to measure ongoing performance in most situations.
However, where more in-depth qualitative and quantitative assessments are indicated, such as in undertaking due diligence, it is strongly recommended that financial audit and accounting measurements be applied.