Important Facts about Stocks

Key Ratios

Common stock usually entitles the owner the right to vote at shareholder meetings and to receive dividends that the company has declared. Owners of preferred stock receive dividends before common shareholders and have priority in the event a company goes bankrupt and is liquidated.

Return on Assets (ROA).
An indicator of how profitable a company is relative to its total assets. Calculated by dividing a company’s annual earnings by its total assets, ROA is displayed as a percentage.
Return on Equity (ROE).
A measure of a corporation’s profitability that reveals how much profit a company generates with the money shareholders have invested. Calculated by dividing a company’s net income by its shareholder’s equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
Price/Earnings (P/E) Ratioo.
It compares a company’s stock price to a future or recent level of earnings per share. When looking at a stock’s P/E multiple, investors should compare it with the range of P/Es that same stock has been valued at in the past and with P/Es of other stocks of similar companies.
Current Ratio.
This ratio is especially critical for companies having financial difficulties. For many industrial companies, a ratio in which current assets are at least 1.5 times current liabilities suggests the ability to meet short-term obligations.
Long Term Debt to Total Capital.
Obtained from the balance sheet, this ratio is used to estimate a company’s financial strength. Companies capitalized with 50 % debt (a debt to equity ratio of 1:1) or more might be over leveraged; heavy interest payments could limit growth of future earnings and restrict available financing for maintenance or expansion. For firms such as utility companies, however, a large proportion of debt, or financial leverage, is typically less of a concern than for other types of companies because utility companies have an adequate and relatively predictable stream of income and cash flow to cover interest expenses.
Price-to-Booked Ratio.
This valuation ratio reveals the value set by the stock market on a company’s assets. If a company’s assets are carried on its books at far below their actual current value while another company’s assets are overstated, a comparison of the two companies’ price-to-book ratios will be distorted.

Owners of preferred stock receive dividends before common shareholders and have priority in the event a company goes bankrupt and is liquidated.

Common Stock & Preferred Stock.

When looking at a stock’s P/E multiple, investors should compare it with the range of P/Es that same stock has been valued at in the past and with P/Es of other stocks of similar companies. For firms such as utility companies, however, a large proportion of debt, or financial leverage, is typically less of a concern than for other types of companies because utility companies have an adequate and relatively predictable stream of income and cash flow to cover interest expenses.
If a company’s assets are carried on its books at far below their actual current value while another company’s assets are overstated, a comparison of the two companies’ price-to-book ratios will be distorted.

A proxy statement is a document containing the information that a company is required by the SEC to provide to shareholders so they can make informed decisions about matters that will be brought up at an annual shareholder meeting. Since it is difficult for shareholders of all geographical regions to attend the meeting in person, the proxy statement gives a shareholder the right, not the obligation, to participate in a vote to elect directors or approve certain corporate decisions. After carefully reading the statement to gain an understanding of the issues, shareholders can vote via the Internet, telephone or by mail.

Financial ratios provide ways to quantify a company’s operating success and financial well-being. The ratios for a given company don’t mean much by themselves, but they are very revealing when compared with the company’s historical ratios and with the ratios of comparable companies in the same industry.

Because provisions in the tax laws allow dividends that they receive from preferred stock to be largely tax-exempt, Preferred stock is largely owned by corporations and institutions. In contrast, dividends on preferred stock received by individual investors are fully taxable. Since most of the demand for preferred shares comes from tax-advantaged buyers, who receive a higher after-tax yield, such stock is typically less attractive than other forms of investments for individuals.
Dividends & Dividend Yield.

The ratios for a given company don’t mean much by themselves, but they are very revealing when compared with the company’s historical ratios and with the ratios of comparable companies in the same industry.

As mentioned in the previous section, a dividend is the portion of a corporation’s earnings that is paid to stockholders. Please note that if the stock was purchased on or after the ex-dividend date (the first day the stock trades without the dividend), then you will not be entitled to receive this dividend payment.

To compute a stock’s dividend yield, divide the amount of the annual dividend by the current price per share. If a stock is priced at $10 a share and the annual dividend is $0.50 a share, the dividend yield is $0.50/$10.00, or 5 %.
Proxy Statement.

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