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Basics of Stock Market - 7

Let us now start analyzing a scrip's fundamental. Today being Vijayadhasami day and normally every hindu will start learning today, I thought of posting today. It will be a short posting.

There are certain key indicators that are used by investors to see whether it is worth investing in that scrip. They are:

(a) Profitability
First of all we need to see whether the company is a profit making one or a loss making one. If it is loss making, no one would be interested in the company, unless you see that the company will do better in the long run and you would like to buy now (if it is in loss, the price of that scrip would be low).

(b) Earnings per Share (EPS)
This is nothing but, how much a share earns. It is computed by dividing the Net Profit after Tax (PAT) by the totoal number of shares of that company. For example, if the PAT is Rs.10,00,000 and the number of shares is 10,000 then EPS is Rs.10.00 (Rs.10,00,000 / 10,000).

(c) Cash Earnings per Share (CEPS)
This shows how much cash a share has earned. This is computed by adding non-cash expense like Depreciation added to the PAT and divided by the number of shares of that company. For example, in our earlier example, the PAT was Rs.10,00,000 and the number of shares is 10,000. Suppose, the depreciation charge is Rs.12,000, the Cash Profit would be Rs.10,12,000 (Rs.10,00,000 + Rs.12,000). Then, the Cash Earning per Share would be Rs.10.12 (Rs.10,12,000 / 10,000).

(d) PE multiple or PE ratio.
PE stands for Price to Earning. This is computed by dividing the Current Market Price (CMP) by the EPS. This will show how many times the Earning is mutiplied. Let us continue the above example. We computed that the EPS is Rs.10.00. Assume that the CMP is Rs.45. The PE is 4.5 times (Rs.45 / Rs.10). Again, we can compare it with the other companies in the same industry/sector. Also, the sector/industry will have a PE. So, you can see where the scrip stands in terms of the industry and other company scrips. If the PE of the industry is 7.5 times, then our scrip is doing good. Lower the multiple, better the scrip value.
The current PE of Infosys is 21.37 times and the SW Industry PE is 20.34 times. Here since the PE is more than the industry average, we can say that it is slightly over-priced. The Steel industry PE is 10.62 times, while TATA Steel's PE is 8.09. So, what do you infer?

(e) Book Value
It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated. Book value of a share is computed by dividing the Book Value of the net assets by the number of equity shares.

(f) Price to Book Value (PBV)
By being compared to the company's market value, the book value can indicate whether a stock is under- or overpriced. PBV is computed by dividing the CMP by the Book Value per share. If the PBV is less than 1, then it means that the scrip is quoting below its Book Value and is worth investing.
CLICK HERE to see which scrips are quoting well below its Book Value
CLICK HERE to see which scrips are quoting well above its Book Value

(g) Dividend history
See how much dividend the company declares every year. This will show how the shareholders are rewarded.

(h) Dividend Yield
This is how much the scrips yields in terms of dividend. As you know the dividend, if declared,will be on the face value. For example, if the company declares dividend of 50% on a share with a face value of Rs.10, the dividend would be Rs.5 per share. (50% on Rs.10). Suppose, the CMP is Rs.25, and we buy it, when it declares dividend, we pay Rs.25 per share and get Rs.5 per share. It means that the yield is 20% (Rs.5 / Rs.25). Again, it depends on how long you hold the share. For example, if you hold it for only a month, then your annual yield would be Rs.240% (20% per month).

CLICK HERE to see the high dividend yielding scrips.

Before you start analysing, you need to know one thing. In the above analysis, we have seen how the indicators are calculated. Some base are fixed for year and the only thing that moves is the CMP. For example, the EPS remains constant throughout the period (unless the results are published), but the PE will keep changing (as CMP is changing everyday). Same is the case with BV and PBV. So, be cautious when you do your analysis.

Catch you with more analysis in the next posting.

Cheers,
Gopal


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