MORE WAYS TO VALUE STOCKS
Kiplinger's Personal Finance|October 2023
Look beyond price-earnings ratios to get a more nuanced picture.
KIM CLARK
MORE WAYS TO VALUE STOCKS

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.

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