Numbers to Consider When Trading Stocks

Many stock traders might hesitate to invest in Adobe in 2025, given that the stock had declined 15.78% YTD by the end of the second week of July. Of this decline, over 10% occurred between June 11 and July 11. Yet some analysts believe that Adobe is undervalued and could prove to be a winning tech growth stock. The reasons for this assessment include the company’s consistent track record of strong revenue growth, high profitability, low debt-to-equity ratio, and increasing digitalisation and cloud adoption across industries.

If you focus only on technical analysis, the charts will show an ongoing bearish trend. This is why fundamental analysis is equally important in stock trading. Some key numbers to consider are the earnings per share (EPS), price-to-earnings ratio (P/E ratio), dividend yield, debt-to-capital ratio, and the return on equity. These numbers can help you gain insights into the financial health of the company and the long-term value of its stock.

Here’s a deep dive into such important numbers for your trading strategy.

Earnings Per Share (EPS)

As the name suggests, EPS shows how much profit a company generates for each outstanding share of its common stock. It is calculated by dividing the total net income of a company by the number of its outstanding shares.

Generally, an increase in the EPS tends to have a positive impact on the stock price and vice versa. For instance, when tech giant NVIDIA announced better-than-expected 1Q 2025 EPS and revenues on May 28, 2025, its stock jumped 6% in after-hours trading.

However, check whether the EPS increase has been consistent or a one-time event and unlikely to be sustained. Also, a higher EPS does not always mean that the company is doing better, since the EPS can increase when either the net income increases or the number of outstanding shares decline.

Price-to-Earnings Ratio (P/E)

P/E ratio measures a company’s stock price relative to its EPS. It is calculated by dividing the current market price per share by the company’s EPS:

P/E Ratio = Price per Share / Earnings per Share

A high P/E ratio tends to indicate investor optimism and expectations of future growth, while a low P/E ratio could suggest undervaluation or potential financial difficulties. However, this ratio can rise if the stock price increases due to reasons other than the company’s strong performance, or if the EPS is low, whether because of low earnings or new share issuance. Also, remember that the P/E ratio tends to vary across industries.

Therefore, it is important to consider other factors such as industry trends, economic conditions and company-specific fundamentals.

Return on Equity (RoE)

This is a measure of a company’s financial performance, derived by dividing its net income by its shareholders’ equity. Net income is a company’s profit after the deduction of taxes, interest, expenses, depreciation and all other costs, while shareholders’ equity refers to profits after debts.

While analysing RoE, remember that this metric too can vary across industries. Plus, a low RoE is not always a bad thing because it may decline during a year if the company buys certain machinery or other equipment. For this reason, RoE should be viewed over a longer term.

Again, a high ROE, due to declining equity levels or increased debt levels, is not indicative of good profitability. Therefore, it should not be the sole parametre to judge a company’s performance.

Debt-to-Capital Ratio

This number reflects a company’s capital structure and its reliance on debt. It is calculated by dividing total debt by the total capital, which is the sum of total debts and shareholders’ equity. While a low debt-to-capital ratio is considered a positive, the ratio is generally high for capital-intensive companies. So, it is best to compare this ratio with that of other companies in the same industry.

While a high debt-to-capital ratio indicates that a company is relying heavily on debt, it may still perform well. A perfect example of this is Lowe’s, a company with a debt-to-capital ratio that rose from 0.84 in May 2019 to a peak of 1.73 in February 2024. This ratio remained stable at above 1.60 through May 2025. On the other hand, the debt-to-capital ratio of its competitor, Home Depot, has remained relatively stable and low in recent years, fluctuating between 0.89 and 1.11. Yet, Lowe’s also has overall history of consistently positive EPS results, with its Q1 2025 EPS beating expectations. 

Dividend Yield

Stock traders can also analyse a company based on its dividend yield, which measures the income derived from holding a stock. This metric is calculated by dividing the total annual dividends paid per share by the current market price per share, then multiplying the result by 100 to express it as a percentage. 

Dividend Yield = (Annual Dividend per Share / Current Market Price per Share) * 100 

Stocks with a high dividend yield are generally considered more attractive. However, it is best to check the company’s previous track record as well as expected yield in the coming years.

For instance, Johnson & Johnson is considered the dividend king, offering a dividend yield of 3.4% as compared to the 1.3% average of the S&P 500 and 1.8% from an average healthcare stock.

It is important to note that no metric alone can provide a holistic view of a company’s financial health or future prospects. It is important to conduct thorough fundamental and technical analysis to make informed stock trading decisions.

To Sum Up

• Fundamental analysis is important to gain insights about a company’s financial health.
• EPS, P/E ratio, debt-to-capital ratio, RoE and dividend yield are important numbers to keep track of.
• These indicators may vary across industries to industry, which makes it important to compare the numbers against those of the company’s industry peers.
• None of the metrics alone provide a clear picture of a company’s financial performance.

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