The ancient Greeks proposed earth,
fire, water and air as the main building blocks of all matter, and
classified all things as a mixture of these elements. Investing has a
similar set of four basic elements that investors use to break down a
stock's value. In this article, we will look at the four ratios and
what they can tell you about a stock.
Earth: The Price-to-Book Ratio (P/B)
Made for glass-half-empty people,
the price-to-book (P/B) ratio represents the value of the
company if it is torn up and sold today. This is useful to know
because many companies in mature industries falter in terms of growth
but can still be a good value based on their assets. The book value
usually includes equipment, buildings, land and anything else that
can be sold, including stock holdings and bonds.
Fire: Price-to-Earnings Ratio (P/E)
The price to earnings (P/E) ratio is
possibly the most scrutinized of all the ratios. If sudden increases
in a stock's price are the sizzle, then the P/E ratio is the steak. A
stock can go up in value without significant earnings increases, but
the P/E ratio is what decides if it can stay up. Without earnings to
back up the price, a stock will eventually fall back down.
Air: The PEG Ratio
Because the P/E ratio isn't enough in
and of itself, many investors use the price to earnings
growth (PEG) ratio. Instead of merely looking at the price and
earnings, the PEG ratio incorporates the historical growth rate of
the company's earnings. This ratio also tells you how your stock
stacks up against another stock.
Water: Dividend Yield
It's always nice to have a back-up when
a stock's growth falters. This is why dividend-paying stocks are
attractive to many investors - even when prices drop you get a
paycheck. The dividend yield shows how much of a payday you're
getting for your money. By dividing the stock's annual dividend by
the stock's price, you get a percentage. You can think of that
percentage as the interest on your money, with the additional chance
at growth through the appreciation of the stock.
Source : Investopedia.com
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