The markets are touching new heights. With every passing day, the index is rebounding with increased vigour. In this resilient and ecstatic bull run, the probability of an investor picking over-heated or over-valued stocks is quite high. Hence, it is crucial for investors to determine the current worth of the stock and how the market values it.
There are tools that determine earnings the company is making, its future potential and how the market values the stock. These are the tools of fundamental analysis that concentrate on growth, earnings and market value. Here are a few parameters that help investors analyse stocks:
Earnings per share (EPS) --
This parameter helps investors to compare stocks on an even ground. EPS are the earnings returned on the initial investment amount. To compute earnings per share, the net earnings must be divided by the outstanding shares.
The formula is:
Net earnings
---------------------------- = EPS
Outstanding shares
EPS, in a nutshell, is the portion of a company's profits, allocated to each outstanding share of common stock.
PE ratio --
The price-to-earnings ratio (PE ratio) of a stock is a measure of the price paid for a share relative to the income or profit earned by the company per share. A higher P/E ratio means that investors are paying more for each unit of income. The reciprocal of the P/E ratio is known as the earnings yield.
The formula is:
Price per share
------------------------- = P / E ratio
Earning per share
Note: Price per share is the market price of a share. Earnings per share is the net income of the company for the most recent 12-month period, divided by number of shares outstanding. The P/E is a reflection of what the market is willing to pay for the company's earnings. The higher the P/E, the more the market is willing to pay for the company's earnings. A high P/E can be interpreted as an over-priced stock. It also indicates optimism and bright future for the market. A low P/E may indicate a negative sentiment in the market that can be missed. Some investors bet on these in anticipation that the market will discover its true value.
Price/sales ratio --
The price/sales ratio (PSR) is a company's stock price divided by its annual sales per share. The formula is: P/E x profit margin = P/S One major drawback with PSR is that this ratio contains no information about a company's debts. There are many companies making no profits and have incurred huge debts, still selling at a favorable PSR. It is difficult for an investor to distinguish between a bankrupt company and a bargain company's stock.
Book value --
The book value of a company is its shareholder's equity, that is, the company's assets minus its liabilities. An asset's initial book value is its actual cash value or its acquisition cost. Cash assets are recorded at actual cash value. Assets such as buildings, land and equipment are valued based on their acquisition cost, which includes the actual cash cost of the asset plus certain costs tied to its purchase.
PEG
This parameter is a metric used to evaluate the relative trade-off between the price of a stock, the earnings generated per share and the company's expected future growth.
Price / annual earnings
--------------------------------- = PEG
Annual growth
A lower ratio implies it is cheaper and a higher ratio means it is expensive. A PEG ratio that gets close to two or higher is classified as expensive. A PEG ratio of one represents a reasonable trade-off between cost as expressed by the P/E ratio and growth.
Tuesday, October 30, 2007
Monday, October 22, 2007
A PROBLEM CAN BE A POTENTIAL BUSINESS
It was well said by leading business author " Robert T. Kiyosaki" in his book "BEFORE YOU QUIT YOUR JOB" that most sucessful business models in the world rotate around two things.
1. It solve a problem
2. It fulfill a need
This was taken into consideration by Rahul Munjal, grandson of Brij Mohan Munjal ( founder of Hero Group ) and he started his own venture called "EASY BILLS". Here is an article on easy bills of Rahul Munjal.
"" Rahul Munjal had spoken to a number of his friends in the United States when he was studying there. One theme that kept recurring was about the problems they faced in day to day life in India. Munjal confided in FINANCIAL TIMES that this was the best way to zero in on a potential business model.
“Ask 10 people what their greatest problems in life are. If three of these problem are common to those 10 people you have three ready made business model in your hands,” laughs Munjal.
Problem is the moot word. Munjal went out to make money through his company Easybill by solving one of the most touchy problem in middle class India: queuing up to pay bills. “In India they don’t mind selling you stuff but they will kill you if you want to pay for those services,” he laughs. “After that they get surprized if people don’t pay their electricity bills and phone bills.”
After Easybill had its way, it was found that men took less leave to pay their bills and took more leave to take their children out to the park and their wives to the movies. It was also found that women who were housewifes now more often paid the family’s bills at the friendly neighbourhood grocer. This was a paradigm shift in the life of the average Indian middle class worker.
Rahul Munjal and his team can be credited to have transfromed a potential problem into a business opportunity. Men are happy too as their wives share more of the backroom jobs of running a family and they get to spend quality time with the kids. That’s fair isn’t it? “Every society has a stage of development,” says Munjal. “In the USA they complain they have to pay for electricity. They say that the federal US government should provide them with electricity free of cost. Here in India, people are ready to pay but they have no electricity for good parts of the day. This is the anomaly and business models should be planned keeping all these factors in mind,” says Munjal.
Right now, he has interesting anecdotes about different utility companies. For instance, a power utility in North India supposedly does not download the paid data from the interim server to the main server sometimes for six months. Another proof that companies in India are not interested in their customers paying them. “Previously, companies used to make it as difficult for their customers to pay them as it was to get their services in the first place,” says Munjal. Now this CEO has his sights set on increasing his company’s services’ footprint throughout India. At the same time, he is continously re-negotiating agreements with utility companies for the best deal.""
1. It solve a problem
2. It fulfill a need
This was taken into consideration by Rahul Munjal, grandson of Brij Mohan Munjal ( founder of Hero Group ) and he started his own venture called "EASY BILLS". Here is an article on easy bills of Rahul Munjal.
"" Rahul Munjal had spoken to a number of his friends in the United States when he was studying there. One theme that kept recurring was about the problems they faced in day to day life in India. Munjal confided in FINANCIAL TIMES that this was the best way to zero in on a potential business model.
“Ask 10 people what their greatest problems in life are. If three of these problem are common to those 10 people you have three ready made business model in your hands,” laughs Munjal.
Problem is the moot word. Munjal went out to make money through his company Easybill by solving one of the most touchy problem in middle class India: queuing up to pay bills. “In India they don’t mind selling you stuff but they will kill you if you want to pay for those services,” he laughs. “After that they get surprized if people don’t pay their electricity bills and phone bills.”
After Easybill had its way, it was found that men took less leave to pay their bills and took more leave to take their children out to the park and their wives to the movies. It was also found that women who were housewifes now more often paid the family’s bills at the friendly neighbourhood grocer. This was a paradigm shift in the life of the average Indian middle class worker.
Rahul Munjal and his team can be credited to have transfromed a potential problem into a business opportunity. Men are happy too as their wives share more of the backroom jobs of running a family and they get to spend quality time with the kids. That’s fair isn’t it? “Every society has a stage of development,” says Munjal. “In the USA they complain they have to pay for electricity. They say that the federal US government should provide them with electricity free of cost. Here in India, people are ready to pay but they have no electricity for good parts of the day. This is the anomaly and business models should be planned keeping all these factors in mind,” says Munjal.
Right now, he has interesting anecdotes about different utility companies. For instance, a power utility in North India supposedly does not download the paid data from the interim server to the main server sometimes for six months. Another proof that companies in India are not interested in their customers paying them. “Previously, companies used to make it as difficult for their customers to pay them as it was to get their services in the first place,” says Munjal. Now this CEO has his sights set on increasing his company’s services’ footprint throughout India. At the same time, he is continously re-negotiating agreements with utility companies for the best deal.""
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