Important percentage figures
Certain percentages are useful in analyzing and comparing stock-issuing companies. For example, financial ratios provide a quantitative measure of a company’s operating performance and financial health, and value ratios help investors determine whether the stock price is reasonable. These ratios may be meaningless to the company itself, but when compared with the company’s past figures, or even compared with other companies in the same industry, these figures may reveal extremely important information.
Return on assets (ROA): An indicator of a company’s profitability relative to its total assets. Return on assets (ROA) provides a basic concept of a company’s ability to use its assets to create economic benefits. The ratio of the company’s annual total income divided by its total assets is the company’s return on assets, sometimes also called “return on investment.”
Return on equity (ROE): A measure of whether a company is profitable. It represents the company’s ability to generate profits using the money invested by investors. The ratio of a company’s net income divided by the total number of shares is the return on equity (ROE). The return on equity is an important figure for comparing the profitability of companies in the same industry.
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Price-to-earnings ratio: The number obtained by dividing the share price by the earnings per share. This number is probably the most commonly used measurement method. It can be used to compare the company’s recent or future earnings per share level. When considering the price-to-earnings ratio, investors should compare the current and past price-to-earnings ratios of the stock, and also compare the price-to-earnings ratios of other companies in similar industries. When evaluating this number, the impact of various possible changes on the number should be considered, such as the rate of change in expected future earnings.
Current ratio: refers to the relationship between current assets (cash or assets that can be converted into cash within one year) and current liabilities (liabilities due within one year). This figure is particularly important for companies that are experiencing financial difficulties. For most industrial companies, if current assets are at least 1.5 times greater than current liabilities, it means that the company has short-term debt repayment ability. If the figure is far below 1.5, it means that the company may be facing a crisis of capital allocation. However, the reference value of these figures may vary greatly depending on the industry.
Long-term debt to capital ratio: This ratio is obtained from the balance sheet and is used to evaluate the financial strength of a company. It is calculated by dividing long-term debt by total capital. (Total capital equals total equity plus long-term debt; this analysis usually gives the company’s debt-to-equity ratio.) A “low-debt” balance sheet means that the company has little or no debt. A debt-to-total ratio of 50% (i.e., a debt-to-equity ratio of 1:1) or more indicates that the company is seriously out of balance, and heavy interest expenses may limit the company’s future profit growth and make it impossible for the company to obtain the funds needed to maintain operations or expand operations. This concept is the same as when we compare the relationship between home loans and home values. However, for utility companies, high debt or high financial leverage is much less important than for other types of industrial companies because these companies have relatively predictable and sufficient income and cash flow to pay interest expenses.
Price-to-Book Ratio: This ratio is calculated by dividing the share price by the earnings per share. This ratio reflects the market’s view on the value of a company’s assets. When comparing it with other ratios, investors may be misled by the price-to-book ratio without further reference. For example, if the net asset value of a company’s books is much lower than its actual current value, the price-to-book ratio of other companies with inflated book assets may be distorted when comparing the two.
Common and preferred stock
There are two main types of stock: common stock and preferred stock. Common stock usually entitles the holder to vote at shareholder meetings and to receive dividends from the company. Preferred stock generally does not have voting rights, but it does have a higher right to participate in the distribution of the company’s assets and profits than common stock. For example, preferred stockholders receive dividends before common stockholders, and preferred stock has priority in the event of a company’s liquidation.
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The majority of preferred stock holders are legal entities, because tax laws stipulate that most of the dividends distributed by preferred stocks are tax-free. In contrast, all dividends of preferred stocks held by individuals are subject to tax. Since most of the demand for preferred stocks comes from buyers who enjoy tax benefits and higher after-tax profits, this type of stock is less attractive to individuals than other forms of investment tools.
Dividends and Dividend Yields
As mentioned above, dividends are profits distributed by a company to shareholders. Therefore, if you buy a stock on or after the ex-dividend date (the first day a non-dividend-paying stock trades), you will not receive any dividends.
The dividend yield is calculated by dividing the dividend by the market price per share. For example, if the market price of a stock is $10 per share and the dividend per share for the year is $0.5, then the dividend yield of the stock is $0.5/$10.00 or 0.5%.
Shareholders’ Statement
The shareholder statement is an explanatory document that contains information related to the proposals at the shareholder meeting that the U.S. Securities and Exchange Commission (SEC) requires to be released to all shareholders so that all shareholders can make resolutions. Since it is difficult to gather all shareholders from different regions together, the shareholder statement gives shareholders the right to participate in voting to elect directors and second certain decisions of the company, but it is not an obligation. After carefully reading the shareholder statement and having a certain understanding of the company’s proposals, shareholders can exercise their voting rights through the Internet, telephone or email.
