Case study choosing shares
Barry decides which shares to buy
wants to invest in shares and is trying to decide between two
companies (Company A and Company B) in the same industry.
He starts his research by visiting the ASX website to get
up-to-date share prices.
Next he gets the annual reports from the company websites and
looks up their earnings per share (EPS) and dividends. He notes
that both these figures have been relatively stable in the
He works out their price earnings ratios (P/E ratios) for both
companies by dividing the share price by the EPS.
He works out the yields by dividing the dividend by the share
The diagram below shows Barry's calculations.
|Share price (a)
|P/E ratio (a/b)
Looking at the results, Barry concludes
that Company A may be better value for money because
it has a lower P/E ratio. This may lead to the share price rising
over time. But Company A has a lower yield, which
means Company B could be a better investment if income is
important to him. These numbers, as well as other research about
the companies, help him make his decision.
Last updated: 13 Oct 2016