Financial Jargon

Ever saw P/E somewhere in stocks discussion forum? Or EPS in the annual reports of companies? P/E and EPS are some of the financial terms you'll find in the world of investing. Before I start my first case study, it is important to know what the terms mean. They help one to decide the intrinsic performance of a company as well as the valuation of the company in the market. Here are some of the more common terms and also what it represents.

P/E (aka Price to Earning Ratio)
The most common metric that you will find. Normally found alongside stock quotes. The number can be found by the equation: P/E =  Stock Price / Earnings
By Earnings, it is meant as Earnings Per Share
P/E ratio helps to value the stock of a company. It is done by comparing the stock price relative to the income generated. For example, if SingPost has a P/E of 26, the buyer is actually paying $26 for every $1 that the company earns. By comparing the P/E ratio of different companies within the same industry, one can find out which companies are "cheaper".
However, P/E is not a clear cut metric to buy stocks. P/E may be higher because the company is expanding fast. P/E may be low because company is in a unpopular industry. P/E will not even exist if the company is loss-making. You can use more ratios introduced further on to determine whether a company is a "good buy".

EPS (aka Earnings Per Share)
The earnings per share made by the company in a financial year. Normal stated in annual reports. Calculated according to the equation: EPS = Net Profit / Total Shares Outstanding
For example, SingPost has a net profit of $128,175,000 and has an outstanding ordinary share of 1,899,921,000. Using the formula, you'll find that the EPS is 6.75 cents as reported in the annual report. Going a step further to find P/E ratio, the stock price of SingPost is currently at $1.765 while EPS is $0.0675.
Dividing stock price by EPS, P/E = 26.14.

P/B (aka Price to Book Ratio)
Book here refers to the Net Asset Value (NAV) of the company. P/B ratio helps one determine whether the stock is priced at a discount or premium to its tangible assets. ( < 1 represents a discount while > 1 represents a premium)
Comparing P/B ratios between companies of similar industries will help determine which one is a good catch. This is especially important because there are different "standard" of P/B in each industry. For example, land developer normally trade at a discount to NAV while technology stocks trades at a premium.

Dividend Yield
When the company chooses to distribute part of its earnings to the shareholders, the money is termed as the dividend. Dividend yield is calculated by the equation: Annual Dividend / Current Stock Price
Dividend distribution is definitely not indicative of a company's strength. Apple Inc, for example, famously did not pay dividend from 1996 to 2012. The stock price was not held back AT ALL.
However, companies that give away dividend is an added bonus as the cash given back is in your pocket. Furthermore, it shows that the company does have the cash and not just "cooking the book".
SGX had once undergone a S-Chip Scandal episode where it involved a number of  China-based companies listed in Singapore. The companies had suddenly gone bankrupt and was later found to be guilty of accounting fraud. Regular dividend distribution acts as a detector to see a company is potentially fraudulent as real hard cash has to be paid out.
                                                                                                                                               
These four financial metrics are the most common metrics I use to filter out a preliminary list of stocks to invest. Google Finance provides a very good platform to filter out a list based on your required criteria. From there, you research deeper on those shortlisted companies and pick the most promising one. This is what "doing your homework" is when it comes to investing.