This means that the company is not by itself an indication of how much its stocks are worth - other factors such as industry trends must be considered. Earnings per share is much more useful information than earnings by itself. Earnings per share (EPS) is calculated by dividing the net earnings by the number of outstanding shares. For example: ABC company had net earnings of $1 million and 100,000 outstanding shares for an EPS of 10 (1,000,000 / 100,000 = 10. . This information is useful for comparing two companies in a certain industry but should not be the deciding factor when choosing stocks.
2. Price to Earning Ratio
The Price to Earning Ratio (P/E) shows the relationship between stock price and company earnings. It is calculated by dividing the share price by the Earnings per Share. In our example above of ABC company the EPS is 10 so if it has a price per share of $50 the P/E is 5 (50 / 10 = 5. . The P/E tells you how much investors are willing to pay for that particular companys earnings. P/Es can be read in a variety of ways. A high P/E could mean that the company is overpriced or it could mean that investors expect the company to continue to grow and generate profits. A low P/E could mean that investors are wary of the company or it could indicate a company that most investors have overlooked.
3. Price to Sales Ratio
When a company has no earnings, there are other tools available to help investors judge its worth. New companies in particular often have no earnings, but that does not mean they are bad investments. The Price to Sales ratio (P/S) is a useful tool for judging new companies. It is calculated by dividing the market cap (stock price times number of outstanding shares) by total revenues. An alternate method is to divide current share price by sales per share. P/S indicates the value the market places on sales. The lower the P/S the better the value.
4. Price to Book Ratio
Book value is determined by subtracting liabilities from assets. The value of a growing company will always be more than book value because of the potential for future revenue. The price to book ratio (P/B) is the value the market places on the book value of the company. It is calculated by dividing the current price per share by the book value per share (book value / number of outstanding shares). Companies with a low P/B are good value and are often sought after by long term investors who see the potential of such companies.
5. Dividend Yield
If all you are looking for are big dividends, then you are a smart investor. Dividend yield is useful for determining the percentage return a company pays in the form of dividends. It is calculated by dividing the annual dividend per share by the stocks price per share. Some people invest in a very sucessful company and don't end up seeing any profits.
If you're a prudent real estate investor, and we'll assume that you are, then once you locate your prospective real estate investment, you must analyze it carefully and thoroughly. You must verify all the details about the property, especially the income and expenses the seller shows. You must never rely on just what you hear.
Develop a property analysis that includes reports like an APOD, Proforma Income Statement, and Rent Roll. In addition to helping you make a wise investment decision, these types of real estate analysis reports also serve as a reminder for items you want to know, such as type of units, age of the property, rent breakdown per unit, expense items, lot size, property and location features, and so on. You can use a real estate investment software solution to assist you.
Analyze the potential real estate investment using the following list of the various phases. If the rental property doesn't seem to make financial sense after your initial analysis has been made, perhaps alter¬ing one or more of these will improve the financial picture and make the property a good real estate investment.
1) Income: Can rents be increased, and can they be increased soon after you purchase the property? Would a change in the type of tenant in the building allow for higher rents, maybe in¬come is suffering because of poor or non-existent management? Can the building be used in some other way to increase income, such as a mo¬tel, or small offices? Be certain local zoning allows for any proposed changes. Is it reasonable to conclude that the property has the potential to provide other income such as a coin-operated laundry facility, garages, or storage rooms?
2) Expenses: Take a close look at operating expenses to see whether any of them are excessive. If they are, is it reasonable to think that you can lower them? You may not have control over all of them, but you may save some money if you intend doing your own lawn maintenance and repairs.
3) Financing: You can adjust the return on an investment merely by applying various financing techniques. Whereas one type of financing package might make your prospective real estate investment look unprofitable, another financing package might as easily turn your prospective property into a sound, profitable investment. Try various alternatives in financing to see how the mortgage impacts cash flow, rate of return, and profitability.
4) Cash flow: Don't just consider the before-tax cash flow produced by the investment real estate to determine your overall benefits. Look at the after-tax cash flow and determine what your property will give you in the way of a return after taxes. It's always best to consider the elements of tax shelter such as the paper loss the IRS permits for depreciation (cost recovery). Here again, good real estate investment software can make this computation for you in seconds, so it doesn't have to be difficult.
5) Price: Some rental properties, regardless of other factors, simply will not make sense unless the seller is willing to accept a lower price. To increase your chances for success, however, don't simply throw out a number. Sellers who get the impression that you're merely trying to low-ball them will be reluctant to discuss the price with you. Tweak the price beforehand to see its affect on the cash flow and rates of return. Then select a price based on the most favorable rates of return. Prepare those figures and discuss them with the seller. You might be surprised to discover a seller willing to listen to reason.
The point is that the numbers must make sense. Never make a decision to purchase investment real estate based on the aesthetic beauty of the build¬ing or by using a simple rule of thumb to determine its value. Remember, only women are beautiful, real estate investing is all about the numbers.
Take the time to prepare a property analysis. This is the only reasonably certain way of making the right investment decision on any prospective real estate investment. If your property analysis shows that the property doesn't make financial sense, forget how pretty it may be and don't buy it!
James Kobzeff has sinced written about articles on various topics from Finances, Property Investment and Finances. James Kobzeff is the developer of the popular ProAPOD real estate investment software solution. Discover how you can create rental property cash flow analysis presentations in minutes at. James Kobzeff's top article generates over 2900 views. to your Favourites.