SK Biswal Chief Engineer at ONGC. Interested in Stock option trading ,Technical Analysis of Stocks & Commodities

Fundamentals Check – As a Load And Leverage Test Of Stocks

3 min read

ASSESSMENT PRINCIPLE

Fundamental  benchmarking  of any stock  is about assessment of the Relative cost and benefit  before making a trading or specially investment decisions. Fundamentals indicate not only the soundness and sustainability of the  company and its business over long term but helps evaluate the relative price you are going to pay and relative value or expected payout  .Simply weighing the relative cost and relative return of picking a stock and load test for you.Remember ,we have to minimize our load and maximize or multiply our future output.However fundamental indicators are silent on Risk on short and medium term although they give clues as to risk of Macro and Micro ecosystems.They are best suited for Buy and Hold strategy any Asset manager would be quick to convince you but not for frequent trading.

fundamental-analysis

Many indicators and calculations are used to assess the value and growth potential of a stock. Here are some key indicators used by investors..

COST OR LOAD  ASSESSMENT

1. Earnings per share (EPS)

This is the amount each share would get if a company paid out all of its profit to its shareholders. EPS is calculated by dividing the company’s total profit by the number of shares.

Example – If a company’s profit is Rs300 million and there are 10 million shares, the EPS is Rs30.

EPS can tell you how companies in the same industry compare. Companies that show steady, consistent earnings growth for many quarters or years, will often outperform companies with volatile earnings on long term.

2. Price to earnings (P/E) ratio

This measures the relationship between the earnings of a company and its stock price. It’s calculated by dividing the current price per share of a company’s stock by the company’s earnings per share.

Example – A company’s stock currently sells for Rs 100 per share and its earnings per share are Rs 5. That means it has a P/E ratio of 20

The P/E ratio can tell you whether a stock’s price is high, or low, compared to its earnings and its relative payout load on you.Some investors consider a company with a high P/E to be overpriced. But sometimes a company with a high P/E today may offer higher returns, and a better P/E, in the future.

3. Price to earnings ratio to growth ratio (PEG)

This helps you understand the P/E ratio a little better. It’s calculated by dividing the P/E ratio by the company’s projected growth in earnings.

Example – A stock with a P/E of 30 and projected earnings growth next year of 15% would have a PEG of 2 (30 divided by 15). A stock with a P/E of 30 but projected earnings growth of 30% will have PEG of 1 (30 divided by 30).Lower load here  is an edge or lead you get by default in the begining.The PEG can tell you whether a stock may or may not be a good value. The lower the number, the less you have to pay to get in on the company’s expected future earnings growth.

4. Price to book value ratio (P/B)

This compares the value the market puts on a company with the value the company has stated in its financial books. It’s calculated by dividing the current price per share by the book value per share. The book value is the current equity of a company, as listed in the annual report.

Most of the time, the lower the P/B is, the better. That’s because you’re paying less for more book value which is lower load on you.If you’re looking for a well-priced stock with reasonable growth potential, you may want to use a low P/B as a tool to identify possible stock picks.

GAIN OR RETURN  LEVERAGE- ASSESSMENT

5. Dividend payout ratio (DPR)

 

This measures what a company pays out to investors in dividends compared to what the stock is earning. It’s calculated by dividing the annual dividends per share by the EPS.

Example – If a company paid out Rs2 per share in dividends and had an EPS of Rs 4, the DPR would be 50%.

The DPR can give you an idea of how well a company’s earnings support the dividend payments. More mature companies will typically have a higher DPR. They believe that paying more in dividends is the best use of their profits for the firm and its shareholders. Since growing companies are likely to have less or no earnings to pay out dividends, their DPR would tend to be low or zero.

 6. Dividend yield

This measures the return on a dividend as a percentage of the stock price. It’s calculated by dividing the annual dividend per share by the price per share.

Example – 2 stocks each pay an annual dividend of Rs2 per share. Company A’s stock is trading at Rs200 a share, but Company B’s stock is trading at Rs100 a share. Company A has a dividend yield of 1% , while Company B’s is 2% The dividend yield can tell you how much cash flow you’re getting for your money, all other things being equal.

Business channels are basically discussing only  these fundamental values and therefore Anchors tend to focus on quarterly results of companies and other developments related to the companies. Risk to value is not product of these variables only. Any temptation  to invest completely on this basis  going to be mistaken and end up in pain with huge disappointment and real disaster .Simply, value is not embedded in company fundamentals only  but in purchasing power or cash flow available in market. Or available supply and demand forces at any time present or expected in future  in market. Business channels don’t tell you that . Value ,contrary to popular belief is an illusion of wealth for an investor in absence of a purchaser or future cash flow .Completely relying on fundamentals mostly shocks the new comer.STOCKS HAVE  VOLATILITY  SOMETIMES SUICIDAL ONES. Take those fundamental recommendations with pinch of salts always. technical could provide some solutions  like a compass. 

SK Biswal Chief Engineer at ONGC. Interested in Stock option trading ,Technical Analysis of Stocks & Commodities

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