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Lesson 12. Evaluating Stocks > The Price/Earnings Ratio - Pg. 69

Evaluating Stocks 69 The EPS is determined by adding up the number of dividends paid over a specific period of time, usually a year or four quarters, or simply the amount paid in one particular dividend payment. For all its simplicity, however, the earnings per share is hands-down the most popular measure of a stock's health. Its simplicity makes the EPS easy to understand and makes it a straightforward indicator of the stock's performance. In addition to having the flexibility to determine a stock's performance over varying time frames, the resulting EPS can be used any number of ways to determine a stock's health. Three of the most common follow: 1. The EPS of one stock can be compared with the EPS of another stock for the same period. Say you want to invest in AT&T. It would probably be a good move to check out the EPS of other similar stocks, such as MCI or Sprint, to get a better idea of how AT&T has performed within the industry. The EPS of a stock can be compared with itself over a different time frame. Comparing your stock's current EPS with its EPS for the same quarter of the previous year will give you a better idea of the stock's growth or decline over a longer period. This method is therefore more often used for stock that will potentially be held long term. A stock's EPS can be charted over a designated time frame. Comparing the EPS of a stock over the previous four quarters, for example, will highlight changes in the stock's performance and enable you to determine ongoing trends. This type of information can be used to anticipate quick or systematic gains or losses in the next period or quarter. Caution 2. 3. When comparing the EPS of different stocks, make sure that the method of determining the dividend is the same. Some companies consider only common stock when determining their EPS; others consider options, warrants, and rights, in addition to common stock. This