What These 3 Key Metrics Tell You About a Stock

When analyzing a company, there are many metrics you can use to get insight into its operations and financial health. If you look at a company's financial statements, you can find everything from its profit to expenses to debt and much more. Here are what these three metrics tell you about a stock.

You shouldn't look at a stock's price by itself to determine whether it's cheap or expensive; it could very well be the case that a $15 stock is expensive and a $1,500 stock is cheap. Investors should use metrics like the price-to-earnings (P/E) ratio to determine whether a stock is a good value at its current price. The P/E ratio compares a company's stock price to its earnings per share (EPS), and it's one of the best ways to determine if a business is overvalued or undervalued. 

When using the P/E ratio, it's important to compare companies within the same industry. Comparing Apple's P/E ratio to ExxonMobil's, for example, probably wouldn't return the best insight. Instead, it would make more sense to compare Apple to Microsoft. As a rule of thumb, if a company's P/E ratio is significantly lower than that of other comparable companies, it's likely undervalued.

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Source Fool.com