Stock Market Metrics

The text below is provided for informational purposes only. It is not investment advice; you must do your own due diligence before making any investments. By reading beyond this point, you agree to hold the owner of this website harmless for your investment decisions.

Book Value is the net asset value (NAV) of the company, which is the difference between total assets and total liabilities. It represents the value that shareholders would receive if the company were to be liquidated. If the stock price is high compared with the book value per share, as measured by the Price-to-Book (P/B) Ratio, the stock may be over valued. One issue with the P/B Ratio is that it may be industry dependent. It may also be affected by recent company events, such as acquisitions or stock buy backs. A P/B ratio of 1 is good, but typically is much higher. For example, well-respected companies such as Apple (15.65), Microsoft (12.03), Visa (15.13), and many others have high P/B ratios as of 20 JAN 2020. Johnson & Johnson (6.73) and Disney (2.93) also have P/B ratios well above 1. Value investors may consider a P/B ratio of 3 or less to be good. The P/B ratio should not be used as the sole indicator of whether a stock is properly valued; it is just one factor to consider.

Price to Earnings (P/E) Ratio is a common measure to assess whether a stock is reasonably valued. It is calculated by dividing the current stock price by a measure of annual earnings per share. There are two PE ratios to consider, trailing and forward:
The Trailing P/E Ratio is the current stock price divided by last year’s earnings. It is often denoted as P/E (TTM), where TTM refers to the ”trailing twelve months”. It is a fact-based measure because it uses actual earnings in the calculation. On the other hand, past performance may not be an indicator of future performance, which should be the concern for the investor.
The Forward P/E Ratio is the current stock price divided by projected earnings for the next year. It is a more speculative measure because it relies on the company’s expectation, or analyst expectations, for earnings. Some companies may underestimate or overestimate future earnings to manipulate the stock price. For example, underestimating earnings can generate an “earnings beat” at the next quarterly earnings announcement, which may boost the stock price. On the other hand, companies may overestimate earnings to generate enthusiasm for the stock to lift the stock price in the short-term.

Some like to use longer periods (e.g. 3 or 5 years) in calculating the P/E ratio. In particular, the 5-year projected forward P/E ratio may be of interest to long-term investors.

You can use the P/E ratio as an indicator of whether the stock is reasonably priced. The long-term average P/E Ratio for the S&P 500 is around 15 to 16. The average P/E ratio by industry, however, is different. Technology stocks generally have higher P/E ratios (often 20 or higher) because they have higher growth rates, whereas industrial stocks, which have slower growth rates, generally have lower P/E rates. For example, as of 20 JAN 2020, Apple had forward and trailing P/Es of 21.05 and 26.81, respectively, whereas Amazon had a forward P/E of 69.55 and a trailing P/E of 82.63. Does this mean these stocks are over valued? Not necessarily; it depends, in part on the growth rate (see PEG ratio).

The PEG Ratio is the P/E ratio divided by the company’s growth rate. A PEG ratio less than 1 may indicate that the stock is undervalued, while a ratio above 1 may indicate the stock is overvalued. Peter Lynch, who is widely considered the best mutual fund manager ever, argued that the PEG Ratio is one of the most important considerations in valuing a stock.

The Dividend-Adjusted PEG Ratio is the P/E ratio divided by the company’s growth rate plus dividend yield. It attempts to improve on the PEG Ratio by factoring in the total return on your investment, which is growth plus the dividend yield.

Moving Averages (MAs) The 50-, 200-, and 400-day moving averages are indicators of the average price of the stock during these time periods. They are calculated daily by literally averaging the price over the last 50, 200, and 400 days. Displaying the MA’s in chart form, along with the current price is a good way to examine stock movements.

When the stock price is above the 50-day MA , it means the stock is priced higher than in the recent past. The same applies to the 200- and 400-day averages. Many people use crossing of the MA lines as signals of when to buy or sell. Specifically, when the 50-day MA crosses above the 200-day MA, it may be a signal to buy because the stock is trending upwards. Similarly, when the 50-day MA crosses below the 200-day MA, it may be a signal to sell because the stock is trending downwards. Note that these are signals of short-term momentum in the stock price rather than indicators of value.

In a sense, using the MAs as buy or sell signals seems contradictory – a form of “buy high, sell low”, which is the opposite of what you want to do. If you regard the 50-day MA being above the 200-day MA as a buy signal, then you are buying when the stock starts to increase above its more recent values, and may be over-priced.

I believe the thinking goes with an old saying, “never catch a falling knife”. If the stock is falling in price, you would like to know that it has truly reached a bottom before buying. If the 50-day MA breaks out above the 200-day MA, then it may be a sign that the bottom has passed, and the stock is recovering.

Return on Assets (ROA) and Return on Equity (ROE) and are generally considered to be measures of management efficiency. Higher numbers are better.

ROA is the ratio of Net Income to Total Assets. It tells you the percent of earnings based on the invested capital (total assets). Values above 20% are generally considered good.

ROE is the ratio of Net Income to Shareholder Equity. It is similar to ROA, but leaves liabilities out of the equation. The S&P average ROE is around 14%, but it varies by industry. Tech stocks, for example, have higher ROE’s than industrial stocks. Thus, it may be best to use ROEs to compare stocks within the same market sector. That said, an ROE of 15% or more is generally considered good.

Profit Margin is Net Income divided by Total assets, which is the same as ROA. Values around 10% are considered to be average, 5% is low, and 20% or more is good. Again, however, values will vary by industry.

Operating Margin is a measure of the company’s profitability. It is the operating income (profit) divided by revenues. Values of 10% or more are considered to be good.

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. measure cash-based operating income. EBITDA measures earnings before accounting for non-operating expenses (taxes, interest, etc.). The EBITDA Margin is EBITDA divided by revenue. As with some of the other metrics, EBITDA varies by sector and may be best suited for comparing companies within the same sector. Higher values are better.


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