Equity Markets and Stock Instruments › Key Stock Metrics

Quantitative analysts use several metrics to characterize stocks and compare them across time or peer groups. These metrics form the basis for factor-based investing and fundamental screening. While no single metric tells the complete story, together they paint a picture of a company's size, profitability, valuation, and shareholder returns.

Market capitalization measures a company's total equity value. This is what the market collectively believes all the company's shares are worth:

$$\text{Market Cap} = P \times S$$

where:

• $P$: current stock price
• $S$: total shares outstanding (shares held by all investors)

This simple multiplication captures the market's aggregate assessment of company value. Market cap changes continuously with the stock price, which reflects new information, shifting investor sentiment, and broader market conditions.

Companies are commonly classified by market cap:

These labels use provider-dependent boundaries. For a disjoint illustrative convention in this chapter:

• Large-cap: $10 billion or more
• Mid-cap: $2 billion to less than $10 billion
• Small-cap: $300 million to less than $2 billion
• Micro-cap: Below $300 million

Market cap correlates with liquidity, volatility, and institutional ownership. Large-cap stocks trade more easily and typically exhibit lower volatility than small-caps. They are covered by more analysts and held by more institutional investors. Index eligibility depends on each provider’s methodology, not a general ranking of how many indices include a stock. Small-cap stocks, conversely, may offer greater growth potential but come with higher volatility, less liquidity, and more information uncertainty.

Basic earnings per share allocates period profit attributable to ordinary shareholders across the weighted-average ordinary shares outstanding during that same period. The numerator therefore reflects relevant preference dividends and other required attribution adjustments; it is not automatically the company’s unadjusted total net income. See the IAS 33 summary for the accounting basis.

$$\text{Basic EPS} = \frac{\text{Profit Attributable to Ordinary Shareholders}}{\text{Weighted-Average Ordinary Shares}}$$

where:

• $\text{Profit Attributable to Ordinary Shareholders}$: the period’s profit allocated to ordinary shareholders after the applicable attribution adjustments
• $\text{Weighted-Average Ordinary Shares}$: ordinary shares weighted by the fraction of the reporting period they were outstanding

EPS expresses the period's accounting profit attributable to ordinary shareholders per weighted-average ordinary share. It does not by itself determine the value of a share.

EPS appears in two forms:

• Basic EPS: Uses weighted-average ordinary shares outstanding for the reporting period
• Diluted EPS: Accounts for potential shares from stock options, convertible bonds, and other dilutive securities

Diluted EPS adjusts both earnings and the weighted-average share count for dilutive potential ordinary shares, such as qualifying options or convertible instruments. Antidilutive instruments are excluded; the calculation does not assume that every convertible or option is included in every circumstance. Its purpose is to show the effect of dilution on the ordinary shareholder’s earnings claim.

The price-to-earnings ratio relates price to profitability, and gives a standardized measure of how expensive a stock is relative to its earnings:

$$\text{P/E Ratio} = \frac{P}{\text{EPS}}$$

where:

• $P$: current stock price per share
• $\text{EPS}$: earnings per share

A P/E of 20 means investors pay $20 for every$1 of current earnings. As a rough earnings multiple, that is twenty times one year’s earnings; it is not a literal investor payback period, because earnings need not be distributed and future earnings, risk and discounting matter. This interpretation illuminates the economic content of the P/E ratio: investors accept high P/E ratios when they expect earnings to grow, making today's price reasonable relative to future earnings.

High P/E stocks may be expensive or may simply reflect high growth expectations. The market expects future earnings to justify today's price. Low P/E stocks may be "cheap" or may face fundamental challenges that depress expected future earnings. The P/E ratio alone cannot distinguish between these interpretations; it must be combined with analysis of growth prospects, competitive position, and business quality.

The P/E ratio can use trailing twelve-month (TTM) earnings, which are historical, or forward earnings estimates, which are projected. Forward P/E relates today’s price to forecast earnings. It is useful when the question concerns expected future profitability, but its interpretation depends on the forecast horizon and accuracy; it is not inherently superior to a trailing measure.

Earnings yield inverts the P/E ratio, expressing earnings as a percentage of price:

$$\text{Earnings Yield} = \frac{\text{EPS}}{P} = \frac{1}{\text{P/E}}$$

where:

• $\text{EPS}$: earnings per share
• $P$: current stock price
• $\text{P/E}$: price-to-earnings ratio

The equivalence $\frac{\text{EPS}}{P} = \frac{1}{\text{P/E}}$ follows directly from the P/E definition. Earnings yield answers: "If I buy this stock, what percentage of my investment does the company earn annually?" This places earnings yield and bond yields in percentage units, but they measure different claims: retained accounting earnings are not a promised cash payment to the investor.

Expressed as a percentage, earnings yield allows comparison with bond yields and other income-producing assets. A stock with a P/E of 20 has an earnings yield of 5%. If government bonds yield 4%, the earnings yield is one percentage point higher. This spread compares different claims and does not by itself estimate an equity risk premium or quantify their relative risk. This comparison forms the basis for the "Fed Model" and other cross-asset valuation frameworks, though such comparisons have important limitations discussed in later chapters.