Definition: Compares the price of a stock to its earnings per share (EPS). It indicates how much investors are willing to pay for each dollar of earnings.
Math: P/E Ratio = Price per Share / Earnings per Share (EPS)
Importance: A high P/E might suggest that a stock's price is high relative to earnings and potentially overvalued, whereas a low P/E might indicate the opposite. For instance, a tech company with high growth prospects might have a high P/E ratio as investors are willing to pay more for future earnings.
Earnings Before Interest and Taxes (EBIT)
Definition: A measure of a firm's profit that includes all expenses except interest and income tax expenses.
Importance: It focuses on the profitability from a company's actual operations, making it useful for comparing the performance of companies in the same industry. For tech companies, it can be a good indicator of operational efficiency before considering financial structure and tax environments.
Earnings Per Share (EPS)
Definition: The portion of a company's profit allocated to each outstanding share of common stock, serving as an indicator of a company's profitability.
Math: EPS = (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares
Importance: It's a common metric used by investors to gauge the financial health of a stock. A higher EPS indicates greater profitability. Tech companies reinvesting heavily for growth might have lower EPS in the short term, but investors might expect higher EPS in the future.
Price-to-Sales Ratio (P/S)
Definition: A valuation ratio that compares a company's stock price to its revenues.
Math: P/S Ratio = Price per Share / Annual Sales Per Share
Importance: It's used to value companies with low earnings or losses, which is common among tech startups. A lower ratio could indicate a more attractive investment, but it's important to compare within industries.
Return on Equity (ROE)
Definition: A measure of the profitability of a business in relation to the equity.
Math: ROE = Net Income / Shareholder's Equity
Importance: Indicates how effectively management is using a company’s assets to create profits. In tech companies, where investments in innovation are crucial, a consistent ROE can indicate effective management and promising growth prospects.