Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 13)

Understanding the Numbers

by

Charles Lamson

Yes, this post is about math. However, do not worry---it is not nearly as bad as you might fear. For the most part, the actual math has already been done for you. We will zero in on what the numbers mean and how they can help you make better investment decisions.

So relax and have some fun with this post of math and numbers.

The Numbers

There are a few basic mathematical expressions you need to get comfortable with to navigate the investment waters. 

Ratio

A ratio is simply a relationship between two related items. The price to earnings ratio (P/E), which we will discuss more in a later post, is a way to compare two companies in the same industry. For example, when a company makes $5 in sales for every $1 spent on marketing you could say they have a marketing/sales ratio of 5 (5/1 = 5). Another company may spend $1 in marketing, but only achieve $3 in sales. Their marketing/sales ratio would be 3 (3/1 = 3). Now you have a way to compare the two companies in marketing efficiency.

Index

An index is another way to measure activity. We have already talked about some of the major indexes (Dow, S&P 500, and so on) in earlier posts and how they work. An index is always tied to a beginning point. The point may be arbitrary.

For example, I could start the Lamson Stocks Nobody Ever Heard of Index (LSNEHI). On January 1, 2018, I set the index at 100. Then every day I measure the increase or decrease in the value of the stocks in this index and adjust the index accordingly. If the next day the LSNEHI stocks gained an average of $3.25 per share, I would report the index at 103.25.

JUST A MINUTE Calculating an investment's yield is a way to compare two dissimilar products. This puts the companies on an even basis, since it is the yield you will ultimately receive.

Yield

Yield is another way of saying return, and is usually expressed as a percentage. Although there are some more specific definitions when talking about bonds, yield for stocks means the percent returned to stockholders in dividends. The dividend yield is calculated by taking the company's dividend per share.

For example, if a company's dividend is currently $1.50 per share and the stock price is $28 per share, the dividend yield is 5.35%:

$1.50/$28 = 0.0535

*SOURCE: ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE,  PGS. 87-88*

END

JUST A MINUTE

Calculating an investment's yield is a way to compare two dissimilar products. This puts the companies on an even basis, since it is the yield you will ultimately receive.