Now that you've become accustomed to the basic Yahoo! Finance watch portfolio, they decide to change their interface. What I've passed on to you within the past two articles still holds, however. Don't let the new interface disturb you. In fact, it's now easier to edit your portfolios, because you can edit them from a link that's located to the right of your portfolio name when you use the drop-down menu to access that portfolio.

Fortunately, the inner workings haven't changed, and that's where I want to take you this week. Some of the terminology that they use for portfolio options can provide you with new insights into the market and into your stock choices.

You will want to start out like you did last week: Open your portfolio, and click on the "edit" link that's located beside the bold "Performance" above your portfolio. When that page opens, you should see all the changes you made last week and the other options located in both the drop-down menus to the left and in the lists located to the right. The terms I want to focus on this week are located under "Fundamentals" in the list at the right.

I want to just focus on three terms this week, as they're pretty tough to understand: The Earnings/Share, the Price/Earnings, and the Price/Share ratios. I want to lump them together to emphasize that you should not use just one of these metrics to determine whether you should buy or sell an equity. They should be used in combination with each other, or with other valuations to determine the whole picture of a stock, since any one of these ratios can be altered by any number of factors:

EPS: Also known as Earnings/Share, or E/S, this ratio reflects the company's net after-tax earnings divided by the number of outstanding shares. So, the basic meaning of Earnings per Share = for every share of common stock outstanding during the year, the company earned $_____ in profit. Therefore, it would seem rational to think that the higher the EPS the better. But, it's always helpful to compare two companies within the same industry to see if that ratio only seems high or if it truly is high. Yahoo! shows only the trailing Earnings/Share, or last year's numbers, as these figures are the true EPS numbers. Current and Forward EPS are projections. As the Motley Fool shows, a buyback or other company activity might alter the EPS numbers and give a false impression on the company's profit earnings.

P/E: Also known as the Price/Earnings ratio or the PSR, the P/E ratio is used to evaluate a stock's current performance. This ratio is calculated by dividing the company's share price by the earnings per share. Or, you can divide market capitalization by net income. If you choose this option in your portfolio, Yahoo! will figure the P/E for you. You will see a number followed by a dot or period followed by another number (like this: 17.83).

While the P/E is considered the easiest metric to figure, it's possibly the most complicated to explain. In essence, the P/E tells us how much an investor is willing to pay for $1 of a company's earnings. The long-term average P/E is around 15, so on average, investors are willing to pay $15 for every dollar of earnings. But, if you picked a stock that has a P/E of, say, 26.26, that doesn't mean that your stock is valued higher than a stock with a P/E of, say, 12.67. A quick look at analyst expectations for earnings growth over the next five years for that company can tell you whether that high P/E ratio is worthy of its status. If the company with the higher P/E shows a slower growth rate than the one with the lower P/E, then you might question whether the higher P/E stock is the one to follow.

For more detail about this ratio, visit the Motley Fool.

P/S: Also known as the Price/Sales ratio or PSR, the Price/Sales ratio is used to evaluate a stock's past performance or it can be used to evaluate a sector or the market as a whole. This ratio is calculated by dividing the company's market cap (number of shares x the price per share) by the company's revenue in the most recent fiscal year (or the most recent four fiscal quarters - this figure is found at the bottom of the company's income statement); or, equivalently, you can divide the per-share stock price by the per-share revenue.

Fortunately, Yahoo! calculates this math for you, so if you pick this option you'll see something like this in your portfolio: 22.52 (a number, a period or dot, another number). Now, some analysts will tell you that a stock that carries a less-than-1.0 P/S ratio (like 0.67) is a good buy, but don't let them fool you. Look at other metrics to learn if a company's low P/S is valid. The P/S ratio should be considered in tandem with net margin (also called net profit margin, it's net income divided by total sales), so that you can capture a truer picture about the company's performance.

Another way to determine a strong stock is to compare a relatively low P/S ratio with a rising stock price. Some investors consider this high relative strength to be a good basis to invest in stocks that have suffered a temporary setback. If that company's P/S ratio is lower than others in its industry, this may indicate a value opportunity.

As you can see from the explanations shown above, the EPS, the P/E, and the P/S ratios are interconnected with each other and with other metrics in stock valuations. So, if you decide to pick any one of these ratios to show up in your watch portfolio, remember that those resultant numbers represent only a portion of that stock's picture.

Until Next Week,
Linda Goin