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PPS is the acronym for a stock’s price per share and is not the same as a stock’s current trading price. Investors calculate PPS when deciding whether to purchase a specific stock. Financial professionals also refer to PPS as market price per share.
Calculating PPS is not an in-depth analysis of a company’s financial health or earnings potential. The purpose of calculating PPS is to give investors a quick overview of the value of the stock. Calculating the PPS and comparing it to the stock’s current trading price can also help investors determine whether a stock is undervalued or overvalued.
The equation to perform PPS calculations is net income minus preferred dividends divided by number of common shares outstanding. You can find a company’s net income on its income statement, preferred dividends on its statement of cash flows and common shares outstanding on the balance sheet. Publicly traded companies release financial reports each calendar quarter called quarterly reports. The abbreviations for these reports are Q1, Q2, Q3 and Q4.
An overvalued stock means that the stock may not be worth the price at which it is currently trading. The price for overvalued stock is artificially inflated due to events other than the company’s financial health or prospective earnings. If the current trading price on the stock is higher than their PPS calculations, investors consider the stock as overvalued. An overvalued stock is likely to experience a price drop. Investors often view overvalued stocks as an unsound investment.
An undervalued stock is a one that is potentially worth more than the price at which it is currently trading. If the current trading price on the stock is lower than the PPS calculations, investors consider the stock as undervalued. Investors perceive undervalued stocks as a sound investment because they believe the stock is likely to experience an increase in trading price.