Investment is a science. Anyone thinking they can come into the market without knowing the investing basics and start investing and make money is someone who is going to be broke very quickly. It is important that an investor knows about basics about investing such as earnings per share, the price/earning ratio and book value so that they can know what they are getting into and what kind of return they are going to get.
Earnings per Share
The earnings per share are the earnings that you will receive on your initial investment. Companies are required in the United States to report the earnings per share on their income statement.
It is possible to determine the earnings per share quite easily using some simple calculations.
For the basic formula, use this:
Earnings per Share = Profit/Weighted Average Common Shares
For the net income formula, use this:
Earnings per Share = Net Income/Weighted Average Common Shares
For the continuing operations formula, use this:
Earnings per Share = Income from Continuing Operations/ Weighted Average Common Shares
The book value, or carrying value as it is sometimes called, is the value of an asset according to its balance sheet. With assets, the value is based on the original cost of the asset, minus the deprecation, as well as the amortization costs against it. To determine the book value of a company, you need to take its total assets and subtract its intangible assets and liabilities. In the stock market, book value is used as a value metric that determines the lowest point for a stock price if it were in a worst-case scenario. This is because when a business is completely liquidated, the book value is what is remaining after all debts and other payments have been paid. Investors will also use the book value per share to determine earnings when the reconciliation of the opening value and closing value has been done.
The price/earnings ratio of a stock determines the price paid per share, in relation to the net income or profit earned by the company per share. If a company has a high price/earning ratio, this means that the stock is more expensive because investors pay more for each unit of net income. The price/earnings ratio will show the investor demand for a company share, allowing individuals to see where the company’s value may go, and whether or not it is a good investment.
It is important to remember that shares in a company are determined by several factors including the market supply and demand, the company’s future performance, the company’s recent performance, the risk in the company and the prospects for companies of this type in that sector. In order to determine the price/earnings ratio, an investor will divide the price of one share in the company by the profits earned by the company per share. This means that if the stock rises in value, but the earnings stay the same or go down, then the price/earnings ratio will go up.
Investing is something that can help you build up your savings and help you live a retirement that you can really enjoy. However, it is important that all new investors take the time to learn how to get the most out of their investments, and to ensure they invest safely. By knowing the concepts of book value, earnings per share and price/earnings ratio, you can ensure your investing is safe and planned out.
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