Analyzing A Corporations Stock


Investors can use various techniques to help them research stocks. In addition to investigating the past history of a corporation, one of the best methods an investor can use to analyze common stock is to run
a Fundamental Analysis. Fundamental Analysis uses a company's financial data to evaluate the
companies stock and to help predict the future market value of the stock based on calculations.

There are many calculations an investor can run when performing a Fundamental Analysis. Five basic
calculations will be described here.
 

I. Earning Per Share


Earning Per Share (EPS) is the amount of net income a company makes per share of
outstanding stock. A high earnings per share indicates to the investor that the company is making large
profits, while a low earnings per share indicates that the company is not making much money at all.
 

To calculate:

Earning Per Share(EPS) = Net Income / Number of Common Shares Outstanding

This information can help the investor make sound investment decisions. For example, a corporation
whose earnings per share figures have steadily increased over a span of five years or more demonstrates
that the corporation has financial stability and the possibility for continued growth.
 

II. Price/Earnings Ratio


Price/Earnings Ratio (P/E) lets investors know how much they would have to pay to purchase
one dollar of earnings. For example, suppose ABC Corporation has a P/E ratio of 12. This means that
investors are willing to pay 12 times the earnings per share for the stock.

Financial advisors vary in their opinions on what constitutes a good P/E ratio. Some say a low P/E ratio,
under 5, is an investment opportunity while others say it signals an uncertain future for a corporation.
On the other hand, a high P/E ratio, such as 10, is interpreted by some investors to mean that the public
has a lot of confidence in the corporation and that the stock will appreciate, while other investors think a
high P/E simply means that the stock is overpriced.

To calculate:

Price/Earnings Ratio (P/E) = Market Closing Price / Earnings Per Share
 
 

III. Dividend Yield

Dividend Yield tells the investor how much of their stock purchase price they will receive in
dividends each year. This analysis is used by investors who are looking for a safe steady income.

To calculate:

Dividend Yield = Annual Dividend per Share x 100 / Market closing Price
 
 

IV. Revenue Per Employee

Revenue Per Employee shows an investor how much money a corporation makes per employee.
This information is useful to the investor in determining whether a corporation is being run efficiently.
For example, if a corporation has 1,000 employees and a total revenue of $100 million, then the
revenue per employee is $100, 000. If the Revenue Per Employee is on an upward swing, then the
company is probably running efficiently. On the otherhand, if the Revenue Per Employee is on a
downswing, then the company may not be running efficiently.

To calculate:

Revenue Per Employee = Total Revenue / Number of Employees
 
 

V. Beta

Beta allows an investor to measure market risk. If the market is in an upward swing, then an investor
would want a Beta of more than 1. If the market is in a downward swing, then an investor would want a Beta of
less than 1.

What does this mean to an investor? If the stock market is in a bull market, stocks with high beta
numbers (greater than 1.00) would increase in value faster than the market itself. If an investor is
confident that the market will continue in an upward swing, then they should look for stocks with a
Beta number of 1 or greater.

If the stock market is in a bear market, stocks with low beta numbers (less than 1.00) would decrease in
value more slowly than the market itself.
 
 

Last updated July 21, 1999
by Megan McCarthy