Following the investment advice of your stock broker—or your neighbour—can take you only so far. In the end most people want to delve deeper into understanding any stocks that they are considering.

This requires knowing more about their “accounting numbers”. The first place that you can see these are in the share columns of newspapers. They come in two types, absolute numbers and ratios. Absolute numbers describe specific quantities and are usually in dollars and cents. Ratios occur when one number is divided by another number.

The current share price is an example of an absolute numbers. On its own it doesn’t give any useful information. To make sense of absolute numbers, they need to be compared with other numbers.

For example, many newspapers will also list the high and low price for the year. By comparing the current price with these prices we can tell whether a share is trading at the top, in the middle, or at the bottom of its 12-month range. At the moment, all the banks are in the top half of their 12-month price ranges whereas Harvey Norman is in the bottom of this range.

Dividend per share is an example of an absolute number. When it is divided by the share price it is called dividend yield and is an example of a ratio. Some newspapers list both the dividend and the dividend yield. Consider Telstra. Its price is around $5.30 and it paid a dividend of 33 cents over the past year. This gives it a dividend yield of 0.33/ 5.30 = 6.2 percent. (The average for the market is 3.7 percent.)

A further pair of numbers listed in many newspapers is that of earnings per share (EPS) and the Price-to-Earnings ratio (PE ratio). The total income of a company is called revenue or sales. What is left after paying expenses and taxes is called earnings. When this is divided by the number of shares outstanding, we are left with EPS. I like to think of EPS as the money earned by the company on my behalf for each share that I own.

But once again, since it is an absolute number, it needs to be compared with some thing. For a start it can be compared with the EPS for previous years. If you are intending to invest in a company, one thing to look for is how much the EPS has been growing over the years.

Price divided EPS is called the PE ratio. Examples of low PE ratios are A.V. Jennings and Tap Oil at 5.06 and 5.57. Examples of high PE ratios are Spotless and Computer Share at 44.99 and 47.97. The average for the market is around 17.3.

When people purchase shares with a high PE ratio they are doing so on the belief that the earnings are going to rise rapidly. If that doesn’t happen, the price can drop very suddenly. On the other hand, shares with a low PE ratio may not grow as fast but they can be steadier.

John Price is CEO of Conscious Investing. Email: johnprice@conscious-investor.com