 Personal finance practice problem using OneNote. Dividend yield earnings per share, price earnings ratio, and payout ratio. Prepare to get financially fit by practicing personal finance. You're not required to, but if you have access to OneNote, would like to follow along. We're in the icon left-hand side practice problems tab in the 12 to 80 dividend yield EPS PE and payout ratio tab. Also, take a look at the immersive reader tool, the practice problems, typically in the text area too with the same name, same number, but with transcripts. Transcripts that can be translated into multiple languages either listened to or read in them. We're thinking about investments in stocks, stocks representing an ownership interest in a corporation. Corporations being separate legal entities which have their ownership interest broken out into standardized units of shares or stocks. We are also typically thinking about publicly traded companies, those which are traded on public exchanges, making them more accessible and transparent, allowing us as investors to see things such as the financial statements to help us make our investment decisions. Also, keep in mind the difference between investing using tools such as mutual funds and ETFs to investing, say, in individual stocks. We're going to be considering more the investment in individual stocks at this point, which means we're going to oftentimes be drilling down on the trends and in the financial statements, underlying financial statements of a particular corporation as opposed to if using tools such as mutual funds or index funds or ETFs. We might be looking at kind of sections or segments of the market in general. Keeping that in mind, we're going to look at some common kind of ratio analysis and we want to think about how these ratios are kind of linked to each other. Remembering that as we're trying to paint a picture to help us decide whether an investment is a good decision or not or the value of a company, there's not one data point that we need to look at. There's multiple data points and we also want to see the connection or the weave between those data points. We'd like to be able to look to something and the more we can kind of connect it to other things, then the better our vision will typically be, the more transparent we can kind of look into the future possibly and make better investment decisions. So we've got the market price that is determined by the market, by supply and demand. We know what it is because these stocks are trading on the market. We've got the dividends per share. This is what's going to be paid out by the corporation. The dividends being similar to draws for a sole proprietor money from earnings of the company being distributed from the company to the owners, in this case, shareholders. If you were a sole proprietorship or partnership, you can basically draw out your own money typically and you might have different draws from different partners. Remember in a corporation, all the one stock cannot have different dividends than another stock. They all have to be the same. And therefore the dividends need to be determined by the company, board of directors and management. One person could get multiple dividends per share because they have multiple shares, but each share has the same amount of dividends. Also note that from a company standpoint, they typically want the dividends to be increasing over time or to have some stability with relation to the dividends. Because if they decrease the dividends, that's usually a bad market sign. So there's usually some kind of stability that we can kind of predict in terms of what the dividends will be yearly or in the future. Also note that oftentimes when we're doing ratio analysis, the default timeframe that we're doing our performance numbers over will typically be a year. So we're typically if they have dividends that are quarterly or something like that, we might try to annualize them and try to think about things from an annual basis in order to compare them with other companies. For example, we got the payout ratio is going to be 60. So that means that basically of the earnings that they have the company has, they're going to be paying out a ratio or a portion of those earnings. So remember that the earnings are on the income statement. We're thinking income statements, bottom line net income. That's how the company performed generally we're thinking over a year and we could take the earnings and then think about how much of those earnings. They're going to be distributing out to the owners in terms of the shares. And we might want to think about that number on a per share basis, meaning all the earnings of the company aren't necessarily draw it out just like with an individual. All the earnings of the company, you don't take it out of the company, you take what you need typically and you try to invest what you can in order to grow the business. Clearly the same thing is true for a publicly traded corporation. They're going to give out the dividends that they can and then keep the money that they think that they could use to grow in order to get a return, hopefully higher than a return than we as individuals could get. Okay, so let's calculate the annual dividend yield. Then if we've got the dividends per share and the market price is 120, the annual dividend yield. This would be our percentage that we can use to kind of compare to other stocks. Remember, we could compare the actual dividend paid out to other stocks, but it's useful to compare the dividend to the market price, how much we would pay for that stock to see the return. And this is the return for a year's timeframe just based on the dividends, not taking into consideration other benefits we might get from the investment in the stock, which could include the increase in the value of the stock price going up, for example. So this is going to be four divided by 120 and we got moved to the decibel two place over 3.333 percent. Obviously this would be a number that's useful to compare to relative other stocks. It might be more relevant a number when you're talking about those more mature stocks, those like utility companies or those that are big ticket stocks typically that are just marching along. They're not really looking to grow. They don't need more infrastructure. The phone lanes are already in place for a telephone company and whatnot, and they're just going to be giving out a dividend. The more that you're looking at a company that's in the growth phase, the dividends might not be as relevant to them because you might be investing in them in order to see them grow. And therefore they might keep the dividends and invest them in order for the stock price to be going up in value over time, hopefully. So then we've got the earnings per share. So the earnings per share, remember the calculation on the earnings per share. What we're trying to do, what you want to have in your head with the earnings per share is you're trying to say the net income for the year. That's the income statement bottom line of it. We'd like to take that income and allocate it. That's what they made. That's what they generated net of the expenses. We'd like to allocate that over the units of ownership, which are the number of shares. So in the past, we've taken a look at that and we said, Okay, well, if you've got the net income, you could divide it by, in essence, the number of shares that are outstanding to get to the earnings per share. It could be a little bit more complex if they have preferred dividends, then it would be earnings minus preferred dividends. And then you could divide it by typically the number of shares as of a point in time you could use as of the date that you're doing the calculation as of year end, possibly. But if there were changes in the number of shares, you might try to use a weighted average number of shares to get like an average number of shares that were outstanding throughout the time period. Although there might not be a change because they might not have distributed, did any shares or done any splits or anything like that. But that's the general idea. So here we're going to take the dividends per share and we have the payout ratio, which is the amount that's going to be paid out of the earnings per share in dividends. And that's going to help us to get the earnings per share. So in other words, if I know the dividends and I know the payout ratio, I could see the relationship I can kind of back into, in other words, the earnings per share. So that would be the four divided by the point six, and that would give us the 6.67. So you might think if you see this in like a book problem or something, you might think, well, I need to memorize this calculation because I would think if I saw an earnings per share, I would need the balance sheet number to figure out the earnings per share number. But we also kind of want to know the relationship between these other kind of calculations as well. For example, the payout ratio, you might know the formula for like the payout ratio, which is going to be the dividends per share. And we're divided by the earnings per share. That's how you get to the payout ratio. So in other words, if they had $4 per share of the dividends and the earnings per share was 6.67, which if we determined what that was, we can then calculate the payout ratio to be 0.6. Now note that this payout ratio could be more or less solid because you might be dealing with a company that actually basically tells you their payout ratio because they might say, hey, look, my dividend policy is that we're going to take our earnings per share and we're going to be paying out a portion of it in the form of dividends. So therefore, their dividend payout is going to be kind of tied to their earnings or some companies might not do that. They might have kind of a fixed dividend that they're going to say, we've committed to this dividend payout in the future. And it's going to be and we're going to we're going to try to just stick to that whether our revenue goes up or down. For example, and in that case, in some of those cases, you might then calculate, you know, the payout ratio to basically figure it out. And that ratio then of course can help you to determine what what payouts might happen in the future because we're trying to estimate or predict what the payouts will be in the future. So you can kind of so if if you knew this ratio, like the payout ratio, then and you're trying to back into the earnings per share, you might not just write down the formula as earnings per share. Equals the the forward the dividends per share divided by the payout ratio. You might just say, I'm going to write down the payout ratio. You might do it algebraically to write it out horizontally. But oftentimes if there's three numbers and I'm using Excel, for example, I'll just make a table of it and say, well, this is how I would normally calculate it. Payout ratio dividend per share dividend per share divided by the earnings per share gives me the payout ratio fill in what you know. We know the dividends per share. We know the payout ratio and then back into the 6.67 and then you can kind of double check it in Excel doing the doing your double check calculation or you can obviously do it algebraically. The reason I kind of point this out is because again, a lot of times with all these ratios, we tend to think that we have to memorize a bunch of different ratios as if they're independent from each other when they're connected to each other. So if I don't know the earnings per share, but I know the payout ratio, I can write down the ratio I know and try to fill in the numbers. And if I only have one unknown, then I can back into basically that one unknown using the formula that I know. And that also helps you to kind of see the integration between the formulas helping you to kind of visualize what's actually going on. Also, if you know the dividend calculation, in other words, the dividends formula, if we know what the payout ratio would be the earnings per share times the payout ratio gives us the dividends. Now, remember that payout ratio could be something that kind of we're going to calculate. We're going to try to determine and figure what we think it will be in the future to help us out with our predictions or it might be kind of like the policy of the company. The dividend policy that they're going to have a payout ratio based on their earnings, their earnings per share, for example. So you could use this calculation and say, okay, I'm going to try to back into the unknown, which is the earnings per share, right? So we could say, okay, if I don't know the earnings per share, I'm just going to write it like normal. I'm not going to try to do the algebra in my head. I'm just going to say, well, there's the unknown and then I've got my payout ratio, which is the 60. And I know the dividends are four. And then I'm going to back into the earnings per share that way. And again, the point of this being that you don't need to kind of rewrite the formula or memorize a new formula. Just write it the way you know, either vertically, because there's only three numbers to it, or you can write it algebraically. And this would be X and you could do your algebra for it. I just, if you have Excel, it's nice to just kind of punch it in this way and then kind of double check it using Excel. And then that helps you to get an understanding of the connection between those numbers. And then the price earnings ratio, the PE, now the price determined by the market is 120. And if we have the earnings per share, remember the earnings per share represents kind of the earnings, the net income allocated over the number of shares, the fixed units of shares. So that means per share they earned over the year $6.67. So that might lead you to think, well, they should give me, as a dividend per share, $6.67. But that's not really what's going to happen. It wouldn't happen even if you were a sole proprietor, right? I mean, if you had $6.67 per share, or if you had that, you know, whatever earnings, if you earned $100,000, for example, you're not going to take out the whole $100,000, you're probably going to be putting some of that $100,000 back into the business to buy equipment or something like that in order to generate more revenue into the future. The same thing's going to happen here. So we're not going to get that $6.67. We're going to get some component of it. We're going to get the payout ratio, the 60% of it. We're saying here in the form of a dividend, them giving us the earnings. But we're hoping that the rest of that will then go back into the business and still give us value because when they buy the equipment, when they increase the size, when they increase their capacity to make money in the future, that they're going to get a return on their investment, which will hopefully be reflected in the stock price. So we expect the stock price to go up, although that will be determined by the market judging the stock price. So we've got the market price and the earnings per share. We're just thinking about how many multiples of the earnings per share is the stock price. And so this is a common comparison, 120 divided by the 6.67. We get around 18 because this number is rounded right there. And so that that means that, and that makes sense because that will, that means that the earnings per share for this year, if they were to pay us out the earnings would be 6.67, even though they're only going to be paying us out the actual dividends, which was 60%, 0.6, 60% or $4 of the 6.67. But those earnings that they had on a per share basis have a multiple of 18. So given that analysis, you would think there would be basically 18 years before the earnings of the company would basically match the market price. And we would get value from those earnings either in the, either in the dividends that were being received, or hopefully the reinvestment of the money into the company, which would be reflected in an increase in the stock price. Now this number then would need to be compared. Is that over or undervalued? Is that number too high or too low? Is it understated or overstated? Well, it's going to be dependent upon other stocks. So all these kind of analysis are typically going to be relative. So we're going to be comparing them to other stocks, typically in their section or in their class. And we might be comparing it to the past, what this particular stock has done in the past, for example.