Share Performance Measurements

Share Performance Measurements

1. Overview of share performance measurements

   • The decision to invest in a company is based on a wide array of encompassing a number of measurements that can be used to interpret the operating and financial condition of an entity
     • The price/earnings ratio compares the price of the stock to the most recently reported earnings of a business, while the capitalization rate derives the implied rate of return on share holdings

2. Price/ Earnings Ratio

   • Is the price currently paid on the open market for a share of a company´s stock, divided by its earnings per share
     • The ratio reveals the multiple of earnings that the investment community is willing to pay to own the stock
       • To calculate the price/earning ratio
         • Current market price per share / Fully diluted earnings per share
         • Its also posible to derive the radio
           • Current company market capitalization / Net after-tax earnings
           • There are several issues with the price/earnings
             • Manipulation
             • Industry-wide effects
             • Timing

3. Capitalization Rate

   • It can be useful to derive the rate of return that investors expect on a company´s stock, based on its current market price and the associated price/earnings ratio
     • Fully diluted earnings per share / Current market price per share

4. Total shareholder return

   • When an investor buys the shares of a company, the return generated by the purchase will be derived from a combination of the change in the share price over the measurement period, plus any dividends paid by the company in the interim
     • Ending stock price - beginning stock price + sum of all dividends received during the measurement period

5. Market value added

   • Derives the difference between the market value of a business and its cost of invested capital
     • To derive market value added
       • Multiply the total of all common shares outstanding by their market price
         • Multiply the total of all preferred shares outstanding by their market price
           • Combine these totals
             • Subtract the amount of capital invested in the business

6. Payout radio

   • Is the portion of dividends that a company pays to its investors in relation to the total amount of its reported net income
     • Investors use it to assess the ability of a business to pay dividends
       • Dividend per share/ earnings per share

7. Market to book ratio

   • A common measure of the value of a company´shares is the market to book ratio which compares the market price of a companys stock to its book value per share
     • Ending market price of stock / Book value per share

8. Insider buy/sell ratio

   • In a publicly-held company a large number of shares are typically held by corporate insiders
     • Aggregate insider stock purchases / Aggregate insider stock sales

9. Options and Warrants to common stock ratio

   • A company may elect to pay third parties with warrants for various services, and compensate its employees with stock options
     • Stock options in the money + Warrants in the money / Total common shares outsanding

10. Short interest ratio

    • Short interest ratio is the number of shares that investors have sold short, and which they have not yet closed out
      • Short interest / Average daily trading volume

11. Institutional holdings ratio

    • The investors in a publicly-held company are typically comprised of a small number of institutional investors and a large number of retail investors
      • Total trading volume / Institutional investor stockholdings

12. Management of performance measurements

    • A final thought regarding performance measurements is that the company should, whenever possible, issue a complete set of measurements, rather than trickling out one or two measurements at a time