The Three Most Important Metrics
Understanding the metrics of investing is very important because this is how investors do research. Maybe you’re wondering what a metric is. Well, they’re just the measurements that can tell you about the stock. If you’re looking at a pokemon card, the metrics would be the HP and the damage.
There are a lot of metrics that financial analysts look at to determine every aspect of a stock but we’re just going to look at the basic ones here. We’ll discuss the three most important ones. Also, remember that you don’t have to actually calculate these yourself. There are plenty of websites that can show you all of these metrics
- Price to earnings ratio (P.E ratio): this is the companies share price divided by the earnings per share. This is widely regarded as the most important metric. Think of it as the price you pay for $1 of company earnings. For example, Google has 12-month earnings of $103.84 per share. Its share price is $2980. Its price divided by its earnings is $2980 / $103.84 = 28.7.
- Beta: this is a measure of a stock’s volatility in relation to the overall market. Volatility means that it goes up and down a lot. The stock market is 1.00. If the beta is higher than 1.00, the stock is more volatile than the overall market. If it’s less than 1.00, the stock is less volatile than the overall market. For example, Tesla has a beta of 2.01. This means that Tesla is 101% more volatile than the overall stock market.
- Dividend ratio: Dividend Ratio: the percentage of the share price that the company gives back in the form of dividends annually. A dividend is a percentage of a company’s profits that the company gives back to shareholders. For example, Walmart has a dividend ratio of 1.5%. Their share price is $144. That means that Walmart pays $2.16 annually for each share owned. This is important to know because dividends are one of the ways you as an investor gets paid.