Stock Investing for Dummies by Paul Mladjenovic

Author:Paul Mladjenovic
Language: eng
Format: epub, azw3
ISBN: 9781119239291
Publisher: Wiley
Published: 2016-04-25T00:00:00+00:00

I like to keep percentages as simple as possible. Ten percent is a good number because it’s easy to calculate and it’s a good benchmark. However, 5 percent isn’t unacceptable if you’re talking about tough times, such as a recession. Obviously, if sales, earnings, and/or net worth are hitting or surpassing 15 percent, that’s great.

Tooling around with ratios

A ratio is a helpful numerical tool that you can use to find out the relationship between two or more figures found in a company’s financial data. A ratio can add meaning to a number or put it in perspective. Ratios sound complicated, but they’re easier to understand than you may think.

Say that you’re considering a stock investment and the company you’re looking at has earnings of $1 million this year. You may think that’s a nice profit, but in order for this amount to be meaningful, you have to compare it to something. What if you find out that the other companies in the industry (of similar size and scope) had earnings of $500 million? Does that change your thinking? Or what if the same company had earnings of $75 million in the prior period? Does that change your mind?

Two key ratios to be aware of are

Price-to-earnings (P/E) ratio

Price to sales ratio (PSR)

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