7 Investor Acronyms to Learn

Yes, EPS sounds a lot like a helpful navigational device you may have in your car. It isn't. But it nevertheless can steer investors in the right direction. EPS stands for earnings per share. Like ROE, it's a tool for measuring profitability. You get EPS by dividing the net income of the company by the number of its outstanding shares of common stock. Most public companies report their EPS on a quarterly and annual basis.

"EPS is a big one," says Richard Ferri, founder of Portfolio Solutions in Troy, Mich., and author of "All About Asset Allocation." "It tells you how much you are making per share."

Remember: The formula is dependent on profits and the number of shares. For instance, a company that earns $1 million and has one million shares outstanding has the same EPS as a company that earns $500,000 and has a half-million shares outstanding. In both cases, the EPS is $1.

Even if you hated high school gym class, you have no reason to dread P-E. In fact, it's a good exercise for measuring the condition of a company. The price-to-earnings ratio is one of the most basic ways to gauge stocks.

To get the P-E ratio is no sweat. Just divide the stock price by its annual earnings per share. If a stock is selling for $10 and it earned $1 per share in its most recent fiscal year, the P-E is 10.

There's no right or wrong ratio: Some companies with low earnings have a high P-E because investors think earnings will grow in the future. Conversely, a reliably profitable company may have a relatively low P-E because its earnings are expected to remain stable. Those are often called value stocks, says Ferri. A P-E can change often, since it is dependent on profit levels and stock prices.

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