To know if we are buying expensive or cheap stocks in the stock market, we must analyze the profits of the companies and their yield, and if they have one.
Here we tell you how to calculate the Price ratio, the Earnings Per Share, and the dividend yield and draw conclusions that will help you make the decision to invest or not in a particular company.
What is the PER, the earnings per share, and the dividend yield?
We can say that the PER (Price Earning Ratio) of a stock is a ratio that measures the stock price of a particular asset and the profits it obtains each year: it tells us the number of times we are paying the profit.
For its part, the Earnings Per Share (EPS) tells us how much the company is generating in value for the shareholder and the dividend yield tells us what percentage we will get when investing in a company that pays dividends.
A good way to start investing in the stock market is to try to find companies with increasing profits: In addition, the EPS is increasing and that they increase the dividend year after year is synonymous, many times, with quality and stability.
These companies in times of crisis can become great investment opportunities.
|PER – Price Earning Ratio||How many years will it take to recover our investment?|
|EPS – Earnings Per Share||How much value is the company generating for the shareholder?|
|Dividend yield||What percentage do we get when investing in a company that pays dividends?|
How is earnings per share (EPS) calculated?
The EPS is a measure of the company’s profit. It is calculated by subtracting dividends from the company’s profit and dividing that result by the number of shares outstanding (Outstanding Shares).
- Net Profit: It is the result of subtracting costs, depreciation, interest, taxes, and other expenses from the company’s income. It is convenient to take the Net Profit from the annual income statement when the consolidated Balance is published by the Business Group.
- Dividends: It is part of dividends distributed among shareholders. We can consult it on the UK Stock Exchange website in the statistics section and in quotation bulletins – UK Stock Exchange – Next dividends. Past dividends can be consulted on the company’s own website.
- Shares outstanding: It is the total number of shares that make up the company. We can consult it in the daily bulletin of the Madrid Stock Exchange website.
Learn to invest in the stock market from scratch: With this guide, learn about the different ways to invest in the stock market, discover what brokers and investment commissions are, how the stock market is structured, and much more.
How is the PER calculated? price / earnings Ratio (P/E Ratio) | PER formula.
The PER is a ratio to value companies according to the quotation price and the earnings per share (EPS). A first very simple way to calculate it if we have the Earnings per Share is:
Another way to calculate it is from the market capitalization and dividing it by the net income:
- Stock Market Capitalization: Stock market capitalization is the value of a company in the market. It is calculated by multiplying the number of shares by the quotation price of each share.
The PER can be seen calculated and estimated on different finance websites. Generally, we see the estimated PER for the next years according to the estimated Net Income by the analysts.
The PER can be slightly different since the Net Income estimates can be different depending on the source from which the data is obtained.
|N/A||If the company has losses, its PER will be indeterminate: a negative PER can be calculated, but an indefinite PER is assigned.|
|0/10||It may be that the stock is undervalued or investors believe that the company’s profits are declining|
|10/17||For analysts, this PER value is appropriate for companies|
|17/25||It may be that the stock is overvalued or that profits have grown since the previous earnings release. It could also indicate that investors believe that future profits will grow.|
|+25||Such a PER may be due to high expectations of future growth of future profits or that the company is in a speculative bubble and prices are inflated.|
The PER tells us how many times we are paying for the company’s profit, or in other words, how many years it will take us to recover our investment according to the company’s profits.
The PER also serves us to compare the valuation that the market has of two or more companies in the same sector. It is a more exact comparison than if we take the market capitalization directly.
It also serves us to compare the valuation of the company with respect to the past and together with an adequate estimation of future profits to be able to reason why now more or less is being paid for the same company than in the past.
Logically we must take into account more aspects, but this is a first approximation to know how many times we are paying for the profits.
How is dividend yield calculated?
From the profit obtained by the company, a part will be allocated to the remuneration of the shareholder, this part is known as Pay Out.
Once we know what part of the profit will be allocated to shareholders, to know the dividend per share we will divide the profit to be distributed in terms of dividends by the number of shares.
Dividend yield formula
Once we know how much money will be distributed per share we can divide that amount by the share price and we get the yield in “per one”. To get the “percent” we just have to multiply it by 100.
For example, if a company X pays an annual dividend of 0.08€ and is now trading at 2.48€, the dividend yield is [(0.08/2.48)*100] = 3.22%
- Pay Out: It is the proportion of the profit that will be distributed among shareholders in terms of dividends.
- Dividend per share: It is the amount that corresponds to each share. It is calculated by dividing the profit to be distributed to shareholders by the number of shares.
Do we receive the net or gross dividend?
We must remember that we receive the net amount of dividends since they are subject to a retention of 21%. On the company websites, we will usually find the dividend they pay (gross) and the dividend we will receive (net) with the corresponding retention applied.
Other ratios to analyze companies
If after this explanation you want to know more about the fundamental analysis of companies and thus improve your financial knowledge, we recommend that check out this article.
On the other hand, it is as important to know information about the future income and performance of a company as it is about its debt structure, so I also leave you with this article about financial ratios that matter.
What does dividend yield represent?
It signifies the return on investment through dividends and helps investors assess income potential.
What role do increasing profits and dividend growth play in stock investment strategies?
Companies with rising profits and a history of increasing dividends often indicate quality and stability. Such companies can present excellent investment opportunities, especially during economic downturns.
Where can I find financial ratios and data for my stock market analysis?
Conduct thorough research and utilize reliable sources to access up-to-date information for your analysis.