Personal Finance

Getting Started: The Income Statement

06/22/07 - 04:59 PM EDT


EPS. Earnings per share (EPS earnings-per-share-eps) can be found at the bottom of the income statement as well, usually after net income. It's the amount of profit that is attributable to each share of the company's common stock common-stock. While it doesn't necessarily tell you what kind of dividends dividend you might get for each share you own, it's a terrific metric that can be used to compare one company against another. (You can use the benchmarking tips in "Getting Started: Fundamental Analysis" to make sure that you're making good comparisons.)

P/E Ratio. The price-to-earnings (P/E price-to-earnings-ratio-p-e) ratio is another great fundamental measurement. The P/E ratio (calculated by dividing the share price by EPS) can be used to try to figure out how over- or undervalued a company's stock is. If a company is trading at a high "multiple multiple" (a P/E ratio that's much higher than others in its sector or industry), its share price might not accurately reflect the company's actual performance.

Margins. Margins (gross gross-margin and net net-margin) are a way of looking at a company's profit as a percentage of revenues. A company with a low net margin (net income divided by its revenues) might be much more vulnerable to suppliers increasing their prices. Also, companies with higher margins don't need to sell as much to end up with the same net income.

Remember, though, none of these numbers or rates are absolute "investable" metrics -- just because a company has a poor P/E ratio doesn't mean that you shouldn't invest in it -- but it should definitely be a big consideration.

Horizontal Insight and Expectations

When you analyze a company's income statement, horizontal analysis (looking at a company's income statement data over a period of time) can also be very valuable. If you're looking at a company with a net loss that's been getting closer and closer to profit over the past couple years, you might be witnessing a turnaround that can make you some money. Likewise, if you notice a downward trend in income (or maybe just an upward trend in expenses), it's often going to be a red flag.

Jonas Elmerraji is the founder and publisher of Growfolio.com, an online business magazine for young investors.

Investing A-to-Z

Personal Finance

Go To Section Home


06/18/07
Getting Started: The Balance Sheet

Don't analyze a company's fundamentals without it.


06/13/07
Getting Started: Fundamental Analysis

Learn how benchmarking can help you sharpen your fundamental analysis skills.


06/08/07
How to Pick Winning Retail Stocks, Pt. 1

Digging deep into the fundamentals is key to unearthing investable companies.


05/18/07
How to Place a Stock Order: Executing Your First Trade

Ready to get in the game? Read this first.


05/11/07
Talking to Management, Part 1: The Big Questions

Armed with these questions, you'll get better answers than sell-side analysts do.


05/11/07
Talking to Management, Part 2: Gleaning Financial Subtleties

Some can't be figured out from the balance sheet.


04/28/08
Cramer's Take on the Top 10 Searched Stocks

Apple and AT&T were among the most searched stocks on TheStreet.com Friday. Here's what Cramer had to say about them recently.


04/26/08
Jim Cramer's Best Blogs

Catch up on his thinking on the hottest topics of the past week.


04/26/08
Coming Week: Make or Break

Investors will have to deal with a Fed meeting and another flood of earnings and economic data.


04/27/08
This Week's Barron's Roundup

Looking for deep value with Defiance Asset Management, polling big investors about where the market's headed, plus much more.


04/28/08
Monday's Analysts' Upgrades, Downgrades

See who made what calls.


02/29/08
3 Stocks I Saw On TV

3 Stocks I Saw On TVDan Fitzpatrick examines three stocks viewed on Fast Money and Mad Money Today's stocks include Deere & Co., Petrobras and MBIA


04/28/08
One Bank Pick Stumbles, the Other Soars

TheStreet.com Ratings checks in on First Community Bancorp and First Niagara Financial Group two months after recommending the stock.


04/28/08
Grand Theft Auto IV Hits the Jackpot

Take-Two's latest hit receives a perfect score from industry reviewers.


Your Recent Quotes: Quote Up0 | Quote Down0
Dow S&P 500 NASDAQ
Oil*
Gold
10 Yr
0.00%
%
%
%
Data delayed 20 min
Premium Stock Ideas
Access Action Alerts Plus to find out Cramer’s latest picks now!