Stock Market Ratio Analysis

Following are the most common stock market ratios:

1) Earnings per share (EPS) = (Net profit after tax − Preferred dividend) / Common shares outstanding
Definition: EPS is the most important ratio which gives shareholder a chance to compare earnings over a period of years.

2) Price-earnings ratio (P/E) = Market price per share / EPS
Definition: This ratio compares the price of a share to the earnings per share.

3) Dividend yield = Annual dividends / Price per share
Definition: This calculates the rate of return by comparing dividend paid to the share price.

4) Earnings Yield = (EPS / Market price per share)
Definition: This is the ratio of EPS to the stock market price.

Example 1:
An investor purchased a common stock at $6 and received a dividend of $0.15 on it, then the Dividend Yield Ratio = (0.15 / 6) * 100% = 2.5%

Example 2:
ABC Stock is currently trading at $20 per share and earnings over the last 12 months were $1.50 per share. Find the P/E ratio and the Earnings Yield.

Formula and Calculation:
P/E ratio = Market price per share / EPS = 20 / 1.50 = 13.33
Earnings Yield = (EPS / Market price per share) = 1.50 / 20 = 0.075 = 7.5%

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