As I continue my studies about stock market investing, I wanted to share with you some common indicators analysts use when evaluating stocks. These three terms were originally introduced in lessons #4 and #5.

A high EPS is good. As you recall, earnings per share is a company’s total actual earnings in the last year (profits minus expenses), divided by the total number of outstanding shares.

What this tells you: How much each share is actually worth, as opposed to the market value, or what you would buy it for on the stock exchange.

Look for EPS values in the 1-5 range. Even higher is better, but unusual. If it is lower, it does not necessarily mean it is a bad stock. If other indicators look good, dig deeper and try to understand why it is lower.

A low P/E is good. P/E is the price of a stock divided by its EPS.

What this tells you: This is where you compare what you are paying for the stock vs. its actual value. Below 20 is really good. Below 10 is WOW! good. If it is higher, again, understand why.

Take a look at the P/S Ratio. The Price/Sales ratio, or PSR, looks at the total market value, divided by the last four quarters of sales revenue. Another way to determine this is by taking the company’s price per share divided by its sales per share.

What this tells you: to paraphrase Jason Kelly, historically, P/S ratio has been a more reliable predictor of stock performance. This is because company’s can calculate their total earnings in different ways, sometimes hiding expenses to inflate the EPS. Total sales is total sales.

And finally,

Look at historical trends versus future analyst’s predictions. For example, this is done for you with P/E. The standard P/E reported is the trailing P/E. Trailing P/E is calculated based on the last twelve months of performance. Compare that to the forward P/E. The f P/E is calculated based on analyst’s future predictions for the next twelve months.

What this tells you. The direction a stock is going.

Understand what these terms mean. Look at their historical and predicted values. This is a valuable first step in determining whether or not a stock is worth evaluating further.

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