In addition to earnings, there are several
other numbers that can help you evaluate a stock's past,
present, and future. The following figures are good indicators
of the shape a company is in, and whether its stock is likely
to be a good investment.
Return on equity
(ROE) is computed by dividing the earnings per
share by the company's book value and is usually reported as a
percentage. Returns over 10% are generally considered healthy,
and over 15% outstanding.
The
payout ratio
shows the percentage of net earnings being paid
as dividends. It can range from zero at companies that pay no
dividends to more than 100%, but any payout over 70% should be
regarded with suspicion.
Sales growth, or the annual percentage increase
in the value of the products or services a company sells, is a
third way to measure a company's potential value as an investment.
But keep in mind that growth potential varies for different-sized
companies. Smaller companies, for example, may grow at a faster
rate than larger, well-established ones.
