Picking a good stock involves taking the time to research a company and understand its financials in order for investors to gain insight into a company's health.
In this module, we examine the long-term potential of a company by looking at factors such as competitive advantages, industry trends & technology shifts.
Module At A Glance
Grade Levels:
8th - 12th
Est. Length:
2-5+ Hours (26 slides)
Activities:
4 Activities
Articles:
6 Articles
Languages:
English & Spanish
Curriculum Fit:
Math, Business, Economics, CTE, Social Studies
Standards Alignment:
CEE National Standards, Jump$tart National Standards & Relevant State Standards
Guiding Questions
What are dividends and why would a company issue them?
Why do investors want to own companies that pay dividends?
What types of companies pay dividends and why?
What are some of the quantitative and qualitative ways to analyze different investments?
How does a P/E ratio help you determine the value of a company’s stock?
Enduring Understandings
Dividends are divisions of profit between stockholders.
Qualitatively and quantitatively analyze a company and determine if it fits in your investment criteria.
P/E ratios are used to compare companies in similar industries to determine future performance.
Calculating a P/E ratio, ROE, and D/E ratio and what these different ratios actually mean.
Module Vocab & Key Topics
Stock
A share of a company which is sold to investors and represents ownership in the underlying company.
Revenue
Income generated from selling goods and services. These returns are from normal business operations so it does not include windfall gains or tax credits.
Earnings
Returns from a company’s activities after expenses have been subtracted. This may or may not include tax expense depending on the context.
Dividends
A portion of a company's earnings distributed to its shareholders, typically paid in cash, but can also be in the form of additional shares of stock.
Dividend Yield
Dividend Yield is a financial ratio that shows how much a company returns in dividends each year relative to its share price.
Blue Chip Stocks
Blue Chip stocks are well- established, large companies with a history of stable earnings. These companies often pay regular and growing dividends, providing a steady stream of income.
Growth Stocks
Growth stocks are shares in high-growth companies, which typically reinvest their profits back into their business, rather than pay dividends.
Penny Stocks
Penny stocks are very low-priced shares of small, often speculative companies. These stocks rarely pay dividends, as these companies need to reinvest any profits to fuel growth.
Price-to-Earnings (PE) Ratio
A ratio used to value companies which measures current share price against per share earnings to help determine if a company is over or undervalued.
Return On Equity (ROE)
This percentage is calculated by dividing the shareholder's equity held in a company by the company's net income for the past year, helping providing an indicator of financial performance and profitability.
Worked Examples
Valuation In Action
Four numbers investors use to size up a stock before they buy it.
Figures current · August 2026
01P/E ratio
What a Dollar of Earnings Costs
P/E = price ÷ EPSEPS = earnings per share
Say Company A trades at $60 and earns $5 a share, while Company B trades at $30 and earns just $1. Dividing price by EPS leaves the dollars paid for each $1 of earnings — and by that measure the cheaper $30 stock is the more expensive one.
30×Company B's P/E, on a $30 shareCompany A: 12× on a $60 share
→A higher P/E means the market pays more for each dollar of earnings, so the stock with the lower share price can be the more expensive one.
02EPS
Slicing Profit per Share
EPS = net income ÷ sharessame profit, two share counts
Say Firm A and Firm B each earn $6,000,000 in net income, but Firm A has 3,000,000 shares outstanding and Firm B has 6,000,000. Dividing the same profit by the share count gives every Firm A share $2.00 of earnings and every Firm B share only $1.00 — twice the shares, half the EPS.
$2.00Firm A's EPS on 3M sharesFirm B: $1.00 on 6M shares
→Earnings per share divides one company-wide profit by the share count, so doubling the shares on the same profit halves what each share earns.
03Dividend yield
The Cash a Share Pays You
yield = annual dividend ÷ priceall at a $100 share price
Say three companies all trade at $100 a share. One pays no dividend, one pays $2 a year, and one pays $5. Dividing the annual dividend by the share price turns each into a yield — the cash a share returns each year, before any change in its price.
5%yield on a $5 dividenda $2 dividend yields 2%
→Dividing the dividend by the price gives only the income a share returns in cash; any gain or loss in the share price is a separate return.
04Market cap
The Real Size of a Company
cap = price × sharesshares outstanding, not price
Market cap multiplies share price by shares outstanding. Company A and Company B both trade at $50, but A has 5,000,000 shares and B has 5,000,000,000. Same price, yet A is a $250,000,000 small-cap and B a $250,000,000,000 mega-cap — a thousand times larger.
$250BCompany B's cap, at $50 a shareCompany A, also $50: $250M
→Share price times shares outstanding is the only measure of size, so two companies at the same price can differ a thousandfold once the share count is included.
Market-capitalization tiers and the equal-price Company A/B example are from FINRA, "Market Cap Explained" (finra.org/investors/insights/market-cap), checked August 24, 2026: small-cap $250M–$2B, mid-cap $2B–$10B, large-cap $10B–$200B, mega-cap $200B+. Cards 1–3 use illustrative companies; every ratio is derived from the figures shown. Reviewed August 2026.
