MORE WAYS TO VALUE STOCKS

Look beyond price-earnings ratios to get a more nuanced picture.

- KIM CLARK

ENTERPRISE value. Earnings before interest and taxes. Free cash flow. Weighted thingamajig foofaraw. Okay, we made up that last one. But there are scores of calculations-many with off-putting acronyms-that investors can use to shed light on a stock's valuation and outlook. Most investors are familiar with a few basic measures, such as the comparison of a stock's price to the company's per-share earnings, or price-earnings ratio (P/E). But professional investors and valuation experts encourage investors to add at least a few less well-known data points to their tool kit.

"Tracking a stock's P/E is a good start," but only a start, says David Wessels, an adjunct finance professor at the University of Pennsylvania's Wharton School and coauthor of a book on valuation. Here are five next-level valuation metrics that can help improve your understanding of a stock's potential.

EARNINGS YIELD

Anyone familiar with P/Es can quickly learn to use earnings yields because they are simply upside-down P/Es. Earnings yields are a company's per-share earnings divided by the stock's price, or E/P. An easy shortcut calculation is to simply divide 1 by a stock's P/E.

Essentially, the E/P tells you how much in earnings a company generates for every dollar invested. The higher the earnings yield, the higher an investment's margin of safety, says Michael Arone, chief investment strategist for State Street Global Advisors. Because E/Ps are expressed as a percentage, they make it simpler for investors to weigh whether to put their money in risky stocks instead of, say, safe Treasury bills.