Advices for Stock Traders

Analyzing their financial data that is ‘fundamental’ to the companies will help determining the value of stocks. Here we are trying to help you pick up the right stocks to buy or sell according to their financial indicators.

Price/Earnings (P/E) ratio is a measure used by investors to tell whether a stock is under priced or overpriced. It shows how much the market is willing to pay for a company’s earnings. It can identify some attractive buys and eliminate some overpriced stocks from your consideration. You need to compare it to those of competitors and the price/earnings ratio of the overall market to get clearer picture.

The P/E ratio relates a firm's current market price to its net earnings for the past year. Calculating a P/E ratio is fairly simple to do. You simply take a firm's current market price and divide it by net earnings per share for the last 12 months.

Those companies with low P/E could be looked at as somehow undervalued.

Price-to-Book ratio (P/B ratio) is determined by taking the company's per share stock price and dividing it by the company's book value per share which in turn determined by taken the company's last quarterly book value divided by the number of shares of stock it has outstanding. Book value of a company is the company's net worth, as measured by its total assets minus its total liabilities. This is how much the company would have left over in assets if it went out of business immediately. Since companies are usually expected to grow and generate more profits in the future, most companies end up being worth far more in the marketplace than their book value would suggest. For this reason, book value is of more interest to value investors than growth investors.

Those companies with low P/B could be looked at as somehow attractive.

Dividend Yield, Dividend/Price (D/P) measures what percentage return a company pays out to its shareholders in the form of dividends. It is calculated by taking the amount of dividends paid per share over the course of a year and dividing by the stock's price. Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower ones, and most small growing companies don't have a dividend yield at all because they don't pay out dividends.

For those who prefer good income companies they might consider such companies with high D/P.

Return on Equity (ROE) is a measure of how well a company used reinvested earnings to generate additional earnings, equal to its Net Income over a 12-month (4 Quarters) period divided by share holders’ equity, expressed as a percentage. It is used as a general indication of the company's efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. It shows you how much profit a company generates in comparison to its book value. Investors usually look for companies with returns on equity that are high and growing.

Formula:

For those who could wait and enjoy the high growing in value, companies with high ROE could be good idea to keep.