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Many stocks trade on the stock market for just a few cents per share, but you might be surprised to learn that the U.S. Securities and Exchange Commission classifies any stock trading at less than $5 per share as a penny stock. Due to the speculative nature of these investments, the SEC has special rules for trading these stocks. However, just because a stock trades below $5 -- or even 50 cents -- does not mean it is a bad investment. Research a penny stock just as you would any other stock
Price-to-earnings Ratio
Find the price-to-earnings ratio by dividing the company's stock price by its trailing 12 months or projected 12 months earnings per share. Often called the earnings multiple, investors prefer lower ratios to higher ratios as you pay a lower price for each dollar of earnings the company generates. Higher multiples often show up in companies with high growth potential, and some investors may refer to companies with excessively high multiples as overvalued. If the ratio is a negative number or not available, this typically means the company has no earnings or profit to calculate this ratio. Certainly, it is preferable to invest in companies making a profit versus those losing money.
Price-to-book Ratio
Determine the book value of a company by subtracting the company's liabilities from its assets. If the book value is positive, it suggests that the company has more assets than liabilities and debt -- a good thing. However, take caution as sometimes companies report many intangible assets on their balance sheets. This is standard practice and acceptable, but it may not give a true version of the company's worth. Calculate the price-to-book ratio by dividing the company's stock price by the company's book value. A result of one or more may indicate that you are paying more for the company than it is worth. A result between zero and one suggests that you might buy the company at a discount to its real value. A negative result may suggest that the company has more liabilities than assets.
Debt-to-equity Ratio
Many companies take on debt to fuel expansion and growth. However, if a company takes on too much debt, there may be a concern about whether it can service its obligations and remain in business. The debt-to-equity ratio illustrates how much the company borrows in relation to its assets. A higher ratio means the company is heavily borrowing against assets such as property, accounts receivable and cash, and it may mean the company is at higher risk of default.
Cash Return on Invested Capital Growth
Investors don't commonly use this ratio when quickly evaluating stocks, but it gives considerable insight about how the company is growing. Expect businesses to invest capital in their companies through equity investments, loan financing and internally generated cash flow. Also, expect them to generate cash from operations to pay for the cost of growth and overhead, and produce some net income for shareholders. If this ratio is declining or negative, the company may be struggling or unable to generate a profit. If this is the case, it may be a red flag to prospective investors.
source-www.ehow.com
Price-to-earnings Ratio
Find the price-to-earnings ratio by dividing the company's stock price by its trailing 12 months or projected 12 months earnings per share. Often called the earnings multiple, investors prefer lower ratios to higher ratios as you pay a lower price for each dollar of earnings the company generates. Higher multiples often show up in companies with high growth potential, and some investors may refer to companies with excessively high multiples as overvalued. If the ratio is a negative number or not available, this typically means the company has no earnings or profit to calculate this ratio. Certainly, it is preferable to invest in companies making a profit versus those losing money.
Price-to-book Ratio
Determine the book value of a company by subtracting the company's liabilities from its assets. If the book value is positive, it suggests that the company has more assets than liabilities and debt -- a good thing. However, take caution as sometimes companies report many intangible assets on their balance sheets. This is standard practice and acceptable, but it may not give a true version of the company's worth. Calculate the price-to-book ratio by dividing the company's stock price by the company's book value. A result of one or more may indicate that you are paying more for the company than it is worth. A result between zero and one suggests that you might buy the company at a discount to its real value. A negative result may suggest that the company has more liabilities than assets.
Debt-to-equity Ratio
Many companies take on debt to fuel expansion and growth. However, if a company takes on too much debt, there may be a concern about whether it can service its obligations and remain in business. The debt-to-equity ratio illustrates how much the company borrows in relation to its assets. A higher ratio means the company is heavily borrowing against assets such as property, accounts receivable and cash, and it may mean the company is at higher risk of default.
Cash Return on Invested Capital Growth
Investors don't commonly use this ratio when quickly evaluating stocks, but it gives considerable insight about how the company is growing. Expect businesses to invest capital in their companies through equity investments, loan financing and internally generated cash flow. Also, expect them to generate cash from operations to pay for the cost of growth and overhead, and produce some net income for shareholders. If this ratio is declining or negative, the company may be struggling or unable to generate a profit. If this is the case, it may be a red flag to prospective investors.
source-www.ehow.com
