How to evaluate a stock?

Presentation Transcript

1. How to evaluate a stock? Demystifying Stocks 2. Investing in a stock or selected stocks is easy when youre equippedwith the right facts coupled with focused analysis. This would not onlysave you a lot of time and unnecessary worry, but also turn you into asmart investor! 3. IntroductionWhile the markets may be chaotic, your approach doesnt have tobe so as well. As a novice investor, there are many things toconsider before you plunge into the volatile sea of equities. Onemay even feel that equity investment is daunting for the notso-experienced, or that it is confusing given the multiple views and socalled tips doing the rounds. 4. To begin with you need to understand yourself and your risktolerance - how much risk are you willing to take and what level ofrisk can you handle. Also, instead of the common practice of chasingstocks based on trends, it is better to understand that youre actuallyinvesting in the companys net worth, and not just its stocks.Therefore, looking at a companys history and performance is key.Here are some insights that will help you evaluate a stock and makethe right choice. 5. Company HistoryIts very important to understand theperformance of the company over alength of time. You can look up thereports of the company and study thesame to know whether it is in a healthyfinancial position. This will indicatewhether the company will generaterelatively good cash flows in the futureand whether it has the muscle to tideover a crisis. 6. Market Cap:This is a simple calculation that refers to the total value of the tradable shares ofa publicly traded company. It is found by multiplying the per-share price timesthe total number of outstanding shares.For instance, Stock price: $50Outstanding shares: 50 millionMarket cap: $50 x 50,000,000 = $2.5 billion 7. Cash FlowCash flow is one of the most important measurements in evaluating a stock. Itrefers to the amount of cash a company brings in and uses after the deductionsand expenses.EBITDA Margin: Simply put, this is how one can measure a companys operatingprofitability. It is equal to earnings before interest, tax, depreciation andamortization (EBITDA) divided by total revenue. Since EBITDA excludesdepreciation and amortization, EBITDA margin can provide investors with aninsight into a companys core profitability 8. P/E RatioThe Price-Earnings (PE) Ratio is a key indicator in valuing a stock. It looks at therelationship between the share price and the companys earnings.It is calculated as: Market Value per Share / Earnings Per Share (EPS)For example, if a company is currently trading at $43 a share and earnings overthe last 12 months were $1.95 per share, the P/E ratio for the stock would be22.05 ($43/$1.95).EPS, is calculated as: Net Income / Number of Outstanding SharesWhile the P/E Ratio does not tell the whole story, and its not advisable to basean investment decision solely on this number, it does help in comparing this withother stocks in the same sector. Typically, a high P/E suggests that investors areexpecting higher earnings growth in the future compared to companies with alower P/E. 9. Return on EquityThis refers to the amount of net income returned as a percentage of shareholdersequity.It is calculated as: Net Income / Shareholders EquityFor instance, if XYZ Bank generated $10,000,000 in net income last year, and itsshareholders equity

equaled $20,000,000 last year, thenROE = $10,000,000/$20,000,000 = 50%This means that XYZ bank generated $0.50 of profit for every $1 of shareholders equitylast year, giving the stock an ROE of 50%.ROE is a measure of efficiency; it indicates how the Management of the company isdeploying its shareholders capital. It is important to note, that comparisons of ROEshould be made of companies within the same industry.ROE is a measure of efficiency; it indicates how the Management of the company isdeploying its shareholders capital. It is important to note, that comparisons of ROEshould be made of companies within the same industry. 10. ConclusionSo, now, youve run the numbers and done a fair bit of analysis. Armed withthis information and basic stock fundamentals, you can get objective aboutyour investments. Keeping all these factors in mind is important vis--vis yourportfolio. Next time around, dont get tempted by the rumours you heararound the water cooler, focus on the facts instead. The age old maxim maysay "buy low, sell high", but you know, that its only wishful thinking. Followthese steps, as this knowledge will help you become a more responsible self-directed investor.