Price/Book Value

The Price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's book value to its current market price. Book value is an accounting term denoting the portion of the company held by the shareholders; in other words, the company's total assets less its total liabilities. The calculation can be performed in two ways but the result should be the same each way. In the first way, the company's market capitalization can be divided by the company's total book value from its balance sheet. The second way, using per-share values, is to divide the company's current share price by the book value per share (i.e. its book value divided by the number of outstanding shares).

As with most ratios, be aware this varies a fair amount by industry. Industries that require higher infrastructure capital (for each dollar of profit) will usually trade at P/B much lower than the P/B of (e.g.) consulting firms. P/B ratios are commonly used for comparison of banks, because most assets and liabilities of banks are constantly valued at market values. P/B ratios do not, however, directly provide any information on the ability of the firm to generate profits or cash for shareholders.

This ratio also gives some idea of whether an investor is paying too much for what would be left if the company went bankrupt immediately. For companies in distress the book value is usually calculated without the intangible assets that would have no resale value. In such cases P/B should also be calculated on a 'diluted' basis, because stock options may well vest on sale of the company or change of control or firing of management.

P/B ratio also known as the "price/equity ratio" (which should not be confused with P/E or price/earnings ratio).Price/book was more popular in the age of smokestacks and steel. That's because it works best with a company that has a lot of hard assets like factories or ore reserves. It is also good at reflecting the value of banks and insurance companies that have a lot of financial assets.

But in today's economy many of the hottest companies rely heavily on intellectual assets that have relatively low book values, which give them artificially high price/book ratios. The other drawback to book value is that it often reflects what an asset was worth when it was bought, not the current market value. So it is an imprecise measure even in the best case.

But the P/B ratio does have its strengths. Like the P/E ratio, it is simple to compute and easy to understand, making it a good way to compare stocks across a broad array of old-line industries. It also gives you a quick look at how the market is valuing assets vs. earnings. Finally, because assets are assets in any country, book-value comparisons work around the world. That's not true of a P/E ratio since earnings are strongly affected by different sets of accounting rules.

PEG Ratio

The PEG ratio is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share, and the company's expected future growth. A lower ratio is "better" (cheaper) and a higher ratio is "worse" (expensive). A PEG ratio that gets close to 2 or higher is generally believed to be expensive, that is, the price paid appears to be too high relative to the estimated future growth in earnings.

It is a generally accepted rule of thumb that a PEG ratio of 1 represents a reasonable trade-off between cost (as expressed by the P/E ratio) and growth: the stock is relatively cheap for the expected growth. If a company is growing at 30% a year, then the stock's P/E could be as high as approximately 30. PEG ratios between 1 and 2 are therefore considered to be in the range of normal values.

When the PEG is quoted in public sources, it is considered preferable to use the expected future growth rate. Investors may prefer the PEG ratio because it explicitly puts a value on the expected growth in earnings of a company. The PEG ratio can offer a suggestion of whether a company's high P/E ratio reflects an excessively high stock price or is a reflection of promising growth prospects for the company.

For example, if HP is trading at a forward P/E of 35 times earnings. After making the comparison and discovering that rivals Dell Computer and Acer are both trading at multiples around 20, you might begin to think HP looks awfully expensive. But then you look at earnings growth. First, you see that HP's earnings are expected to grow at 40% annually over the next three to five years, while analysts are predicting Dell will grow at 15% and Gateway at 20%. That would give HP a PEG of 0.88, while Dell weighs in at 1.33 and Acer at 1. Dell doesn't seem so pricey after all.

Generally you use a forward P/E in the PEG ratio, but a low PEG using a trailing P/E is even more convincing. Anything below 1 is of interest, although there really are no rules of thumb. Like the P/E, different industries regularly trade at different PEGs. It's also true that the PEG works less well for large-cap companies that by nature grow at a slower rate despite strong prospects. As always, the key is to compare a company to its peers.

P/E Ratio

The P/E ratio (price-to-earnings ratio) of a stock (also called its "earnings multiple", or simply "multiple", "P/E", or "PE") is a measure of the price paid for a share relative to the income or profit earned by the firm per share. A higher P/E ratio means that investors are paying more for each unit of income. It is a valuation ratio included in other financial ratios. The reciprocal of the P/E ratio is known as the earnings yield.

If Apple is trading at $90 a share, for instance, and earnings was $3 a share, its P/E would be 30 (90/3). That means investors are paying $30 for every $1 of the company's earnings. If the P/E slips to 27 they're only willing to pay $27 for that same $1 profit. This number is also known as a stock's "multiple," as in Apple is trading at a multiple of 30 times earnings.

The traditional P/E is what's known as a "trailing" P/E. It's for the previous 12 months. Also popular among many investors is the "forward" P/E -- It's for the coming year. Which is better? The trailing P/E has the advantage that it deals in facts -- its denominator is the audited earnings number the company reported to the Security and Exchange Commission. Its disadvantage is that those earnings will almost certainly change -- for better or worse -- in the future. By using an estimate of future earnings, a forward P/E takes expected growth into account. And though the estimate may turn out to be wrong, it at least helps investors anticipate the future the same way the market does when it prices a stock.

The biggest weakness with either type of P/E is that companies sometimes "manage" their earnings. It's also true that earnings estimates can vary widely depending on the company and the Wall Street analysts that follow it. So the P/E ratio should be viewed as a guide to you.

Short Interest Ratio

Selling short - When the investor who do not have stocks but borrows them and sell them in the market. it's becoming increasingly popular among individual investors. Why investor sell short? because the nvestors decides that all signs point to a decline in the stock price rather than an increase. So the investor borrows shares of the stock at that price and immediately sells them. After the stock falls, he buys it back on the open market to repay his debt. But since the price is lower, he pockets the difference.

A higher short interest ratio indicates more pessimism, because a higher proportion of a company's total float has already been sold short. It should always be treated as a red flag. But high short interest doesn't necessarily mean you should avoid the stock. After all, short sellers are very often wrong.

The short ratio (or short interest ratio) is usually the number of shares outstanding of a publicly traded company that is sold short, divided by the average daily trading volume. It can also be the percentage of the free float that is "shorted". The short-interest ratio tells you how many days -- given the stock's average trading volume -- it would take short sellers to cover their positions if good news sent the price higher and ruined their negative bets. The higher the ratio, the longer they would have to buy -- a phenomenon known as a "short squeeze" -- and that can actually buoy a stock. Some people bet on a short squeeze, which is just as risky as shorting the stock in the first place. Our advice is this: Use the short-interest ratio as a barometer for market sentiment only -- particularly when it comes to volatile growth stocks.

The short interest and short ratio can be deceiving, however, when a company has many convertible securities outstanding and is perceived to be at risk, because convertible and options arbitrageurs will often sell the stock short to manage risk with their long positions in these other instruments.

Technicans (Technical Analysts) interpret this ratio contrary to one's initial intuition. Because short sales reflect investors' expectations that stock prices will decline, one would typically expect an increase in the short-interest ratio to be bearish. On the contrary, technicans consider a high short-interest ratio bullish because it indicates potential demand for the stock by those who previously sold short and have not covered the short sale.

A technician would be bullish when the short interest ratio approached 5.0 and bearish if it declined toward 3.0.

Convertible hedgers are usually not hoping the price of shares will fall and, if properly hedged, can cover their short positions with shares embedded in the convertible securities. Thus, a large short interest position for such companies does not necessarily imply a classic short squeeze, and the short interest ratio becomes somewhat meaningless.

There are entire companies devoted to selling stocks short and they make it their job to seek out companies that are in trouble. They pore over financial statements looking for weaknesses. But sometimes they merely think a company is too highly priced for its own good.

Efficiency Ratio

The Return on Assets (ROA) percentage shows how profitable a company's assets are in generating evenue.

ROA can be computed as:

ROA = Net Income / Total Assets = (Net Income / Sales) * (Sales / Assets )

This number tells you "what the company can do with what it's got", i.e. how many dollars of earnings they derive from each dollar of assets they control. It's a useful number for comparing competing companies in the same industry. The number will vary widely across different industries. Return on assets gives an indication of the capital intensity of the company, which will depend on the industry; companies that require large initial investments will generally have lower return on assets.

Return on Equity (ROE, Return on average common equity, return on net worth) measures the rate of return on the ownership interest of the common stock owners. ROE is viewed as one of the most important financial ratios. It measures a firm's efficiency at generating profits from every dollar of net assets, and shows how well a company uses investment dollars to generate earnings growth. ROE is equal to a fiscal year net income(after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage.

ROE = Net Income / Average stockholder's equity

But not all high-ROE companies make good investments. Some industries have high ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. You cannot conclude that consulting firms are better investments than refiners just because of their ROE. Generally, capital-intensive businesses have high barriers to entry, which limit competition. But high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding. As with many financial ratios, ROE is best used to compare companies in the same industry.

High ROE yields no immediate benefit. Since stock prices are most strongly determined by earnings per share (EPS), you will be paying twice as much (in Price/Book terms) for a 20% ROE company as for a 10% ROE company. The benefit comes from the earnings reinvested in the company at a high ROE rate, which in turn gives the company a high growth rate. ROE is irrelevant if the earnings are not reinvested.

As measures of pure efficiency, these ratios aren't particularly accurate. Because earnings can be manipulated. It's also true that the asset values expressed on balance sheets are not entirely reflective of what a company is really worth. General Eletric or an investment bank like Goldman Sachs rely on thousands of intellectual assets that walk out the front door every day.

But ROE and ROA are still effective tools for comparing stocks. Since all U.S. companies are required to follow the same accounting rules, these ratios do put companies in like industries on a level playing field. They also allow you to see which industries are inherently more profitable than others.

Dividend Yield

The dividend yield on a company stock is the company's annual dividend payments divided by its market cap, or the dividend per share divided by the price per share. It's often expressed as a percentage.

A dividend is a company make a payment to its shareholders from their earnings. It's usually payout as a per-share amount. When you compare companies' dividends, usually we call the "dividend yield" or "yield." That's the dividend amount divided by the stock price. Example: If a stock pays an annual dividend of $4.5 and is trading at $90 a share, it would have a yield of 5%.

Not all stocks pay dividends, nor should they. If a company is growing quickly and can best benefit shareholders by reinvesting its earnings in the business, that's what it should do. Google doesn't pay a dividend, but the company's shareholders aren't complaining. A stock with no dividend or yield isn't necessarily a loser.

When you're searching for stocks with high dividend yields, you should always look at the company's payout ratio. It tells you what percentage of earnings company is paying out to shareholders in the form of dividends. If the number is above 65% consider it a red flag -- it might mean the company is failing to reinvest enough of its profits in the business. A high payout ratio often means the company's earnings are faltering or that it is trying to entice investors who find little else to get excited about.

But don't invest stocks with the highest yield only, it might get you in trouble. When a stock at $100 a share and it has $4 dividend, so it has 4% yield. 4% is well above the market average, which is usually about 1.5 to 2%. But that doesn't mean all is well with the stock. Consider what happens if the company misses a quarterly earnings; and the price falls to $80. That's a 20% drop in value, but it actually raises the yield to 5%. Would you like to invest in a stock that just missed an earnings; Probaly not.

Beta

The Beta coefficient, in terms of finance and investing, is a measure of a stock's volatility in relation to the rest of the market. Beta is calculated for individual companies using regression analysis.

That's worth knowing if you want to avoid being shocked into panic selling after buying it. Some stocks trend upward with all the consistency of a firefly. Others are much more steady. Beta is what academics call the calculation used to quantify that volatility.

The beta figure compares the stock's volatility to that of the S&P 500 index using the returns over the past five years. If a stock has a beta of 1, it means that over the past 5 years its price has gained 10% every time the S&P 500 has moved up 10%. It has also declined 10% on average when the S&P declines the same amount. In other words, the price tends to move in synch with the S&P, and it is considered a relatively steady stock.

The more risky a stock is, the more its beta moves upward. A figure of 2.0 means a gain or loss of 20% every time the S&P gains or loses just 10%. Likewise, a beta of 0.5 means the stock moves just 5% when the index moves in either direction. A low-beta stock will protect you in a general downturn, a high Beta means the potential for big rewards in an upturn.

That's how it is supposed to work. But it is not guarantees about the future. If a company's prospects change for better or worse, then its beta is likely change, too. So use the figure as a guide to a stock's tendencies only.