3.4 Earnings and Dividends
Earnings per share is simply taking the net income of a business, we're gonna subtract the dividends paid to preferred stock, cuz those are obligatory, they're, they're dealt with as debt. So, the net income minus dividends on preferred stock, and divide that by the average outstanding shares. The price-earnings ratio basically tells us how much the market is willing to pay for each dollar of profit in that company.
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So, the final classification of ratios we have are the earnings and dividend ratios. And these are probably the ones that you hear about most often. Right? Because, these are reported quarterly. These are, are thrown about when people are talking about investing, et cetera, et cetera. The first one is earnings per share. Earnings per share is simply taking the net income of a business, we’re gonna subtract the dividends paid to preferred stock, cuz those are obligatory, they’re, they’re dealt with as debt. So, the net income minus dividends on preferred stock, and divide that by the average outstanding shares. So, that’s how much the company earned for each sh, piece of, for each share outstanding, earnings per share. Commonly used in, in the analysis of companies. The next one, of course, is dividends per share. If I own shares, how much did I get in dividends for each share that I own? So, this is dividends divided by the number of shares outstanding. The final earnings and dividend ratio is the price-earnings ratio. You’ve probably heard this a lot. And, if you’re like most people you don’t really understand it, but you know a higher number is better. The price-earnings ratio basically tells us how much the market is willing to pay for each dollar of profit in that company. Now, this almost sounds weird, why would I be willing to pay more for one, for a dollar of profit in one company than another? Well, think about it. The more confidence that you have that a business is going to make money, the more you’re willing to pay for the money that that company generates, right? Whereas, if the money that a company is gonna generate is dubious, or you’re less certain, you’re gonna pay much less for it, right? So, the price-earnings ratio is really a ratio that shows market confidence in the performance of a company. And, that’s why this ratio is important. You’re actually able to see how the market is, how confident the market is in the projected earnings, or the future earnings of that company. So, that concludes the earnings and dividends ratios. And, that concludes this module on ratios. Again, there’s so much more to learn on ratios. You can study these things online. They’re fun to play around with. And, we are going, we have some, exercises for you to use the ratios, to calculate things, and to see what conclusions you can draws by doing so. And, I will see you all in the next and final module in this course, in which we will be looking at the evaluation of companies and investments. See you then.
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