How to Calculate Earnings, Dividends & P/E
There are two ways in which investors can make money--price appreciation and dividends. Dividends are paid out to investors through after-tax earnings; that is, net income. A P/E--or price to earnings--ratio provides investors with insight on the price appreciation side of the investor return equation; the ratio is looked at as a price tag by savvy investors. Together, these three data points provide an investment profile for a company.
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Instructions
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Gather information. You will need the company's 10K (annual update),10Q (quarterly update) or annual report for access to its financial statements and their accompanying notes. You can access these from the SEC (Securities and Exchange Commission), Yahoo! Finance or other financial Web site, or the investor relations site of the issuing company.
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Calculate Earnings. Go to the income statement. The top line will always be sales or revenue, and the bottom line is net income. The line items in between walk explain how earnings were calculated. Net income is equivalent to after-tax earnings.
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Calculate dividends. Dividends are paid out of retained earnings as cash. You will find the total dollar amount for dividends on the bottom half of the company's cash flow statement. This section is labeled "cash flow from operations." There will be one line item for dividends. Divide this amount by the total number of shares outstanding for dividends per share (DPS). Look for details on the dividend payout in the notes to the income statement or past press releases.
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Calculate P/E. Go to Yahoo! Finance or another financial Web site to look up the current price of the stock and then divide this by the "earnings per share" number found on the income statement. Compare against other P/E ratios in the company's industry. A high P/E signifies the stock is overvalued and a low P/E signifies the stock is undervalued.
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