Sample calculation and formula for financial ratios

1. Price-to-Earnings (P/E) Ratio

Formula:

Example: If ABC Corp’s stock is trading at $50 per share and its EPS is $5, the P/E ratio would be:

This means investors are willing to pay $10 for every $1 of earnings.

2. Earnings Per Share (EPS)

Formula:

Example: If ABC Corp has a net income of $1,000,000, pays $100,000 in preferred dividends, and has 500,000 outstanding shares, the EPS would be:

This means the company earns $1.80 per share of common stock.

3. Dividend Yield (DY)

Formula:

Example: If ABC Corp pays an annual dividend of $2 per share and its stock price is $50, the dividend yield would be:

This means the dividend yield is 4%.

4. Return on Equity (ROE)

Formula:

Example: If ABC Corp has a net income of $1,000,000 and shareholders’ equity of $5,000,000, the ROE would be:

This means the company generates a 20% return on shareholders’ equity.

5. Price-to-Book (P/B) Ratio

Formula:

Example: If ABC Corp’s stock is trading at $50 per share and its book value per share is $25, the P/B ratio would be:

This means the stock is trading at twice its book value.

Summary

  • P/E Ratio: Indicates how much investors are willing to pay per dollar of earnings.
  • EPS: Measures the profitability per share of common stock.
  • Dividend Yield: Shows the annual dividend income relative to the stock price.
  • ROE: Reflects the company’s efficiency in generating profits from shareholders’ equity.
  • P/B Ratio: Compares the market value to the book value of the company.