Wednesday, July 31, 2013
Fundamental Analysis And The Five Main Ratios
Fundamental Analysis and the five main ratios
Fundamental analysis also known as quantitative analysis involves the detailed analysis of financial statements to assess how a company may perform in the future. Fundamental analysis is not qualitative analysis, i.e., it does take account of the intangible and hence hard-to-measure aspects of a companys operations such as the value of its goodwill, the value of any brands it may own and other intangibles. Neither does fundamental analysis encompass technical analysis where decisions to trade are based solely on a shares price and volume movements. Fundamental analysis uses real, hard data to ascertain a shares real (intrinsic) worth by examining revenues, earnings, future growth, return on equity, profit margins and other data. When positive anomalies are found i.e. a companys share appears undervalued, then the investor may consider buying in.
Investors who depend solely on fundamental analysis (Value Investors) will normally use at least five key ratios to decide whether a share represents good value or not. For these ratios to be meaningful, the comparisons should be between i) similar entities in similar sectors or industries and ii) well established businesses as distinct to start ups, or businesses in other special circumstances.
Price-to-Earnings Ratio (P/E)
One of the best-known and most valuable of the five key ratios. P/E compares a companys current share price with its past (trailing P/E) or potential earnings (forward P/E) per share. If, for example, a companys share price is currently 10 a share and the earnings over the last 12 months (a trailing P/E) were 0.50p a share, then the P/E ratio would be a value of 20 (10 divided by 0.50p). Assuming the financial performance of two companies is almost identical, then the company with the lowest P/E ratio costs less per share for the same financial outcome than the one with the higher P/E.
Price-to-Book Ratio (P/B)
The P/B indicates the amount investors are willing to pay for a share of the companys tangible assets, which by definition excludes intangible assets such as goodwill. The investor must first know the book value of all the companys fixed and current assets minus its current and long-term liabilities values which can be obtained from the balance sheet. The ratio is calculated by dividing the total value of the assets by the total number of issued shares. If the resultant ratio is less than 1, it would mean that shares can be bought in that company for less than the book value of its assets.
Debt-to-Equity Ratio (D/E)
The D/E ratio also known as Gearing indicates what proportion of shareholders funds (and some other types of debt such as loans or bonds) are being used to finance the assets of the business. It can also indicate how much money a company can safely afford to borrow over the long term. To determine the D/E ratio, the companys total long term debt is divided by shareholders equity. If a company has total debts of 1,000,000 and shareholders equity of 4,000,000 then the debt/equity ratio would be 0.25 (1,000,000 divided by 4,000,000). Where the ratio is higher than 100 the majority of the companys assets are financed through debt: if the ratio is less than 100, then the assets are financed mainly through equity.
Free Cash Flow (FCF)
Free cash flow measures how much money a company has left over after paying its overheads and taxes, making any capital investments and covering its working capital requirements. Knowing the FCF is particularly important to shareholders as it shows the amount of money thats available for dividend payments. FCF also enables the business to buy back shares, reduce or eliminate debt and invest in plant and equipment. The ratio is calculated by subtracting non-discretionary costs such as capital expenditure from the companys operating cash flow and then dividing that figure by the companys market capitalisation and total debt. Strong companies usually show positive free cash flow and the higher the FCF ratio, the better.
The price to earnings growth ratio (PEG)
This is an extended version of the P/E ratio as it takes earnings growth into account. PEG compares a companys P/E ratio to its earnings growth rate to determine whether the shares are undervalued or overvalued. The ratio is calculated by dividing a shares P/E ratio by its projected year-over-year earnings growth rate. So if for example the companys earnings per share the previous year were 15p and projected earnings per share this year are 18p that represents an earnings growth rate of 20%. On that basis if the companys P/E ratio were 30 then the PEG would be 1.5 i.e. 30/20 suggesting that the shares may be overvalued by as much as 50%. Conversely, and as a rule of thumb only, a PEG of less than 1.might suggest the shares are cheap. Generally speaking, the lower the PEG, the better the value, because each module of earnings growth costs the investor less.
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Fundamental analysis also known as quantitative analysis involves the detailed analysis of financial statements to assess how a company may perform in the future. Fundamental analysis is not qualitative analysis, i.e., it does take account of the intangible and hence hard-to-measure aspects of a companys operations such as the value of its goodwill, the value of any brands it may own and other intangibles. Neither does fundamental analysis encompass technical analysis where decisions to trade are based solely on a shares price and volume movements. Fundamental analysis uses real, hard data to ascertain a shares real (intrinsic) worth by examining revenues, earnings, future growth, return on equity, profit margins and other data. When positive anomalies are found i.e. a companys share appears undervalued, then the investor may consider buying in.
Investors who depend solely on fundamental analysis (Value Investors) will normally use at least five key ratios to decide whether a share represents good value or not. For these ratios to be meaningful, the comparisons should be between i) similar entities in similar sectors or industries and ii) well established businesses as distinct to start ups, or businesses in other special circumstances.
Price-to-Earnings Ratio (P/E)
One of the best-known and most valuable of the five key ratios. P/E compares a companys current share price with its past (trailing P/E) or potential earnings (forward P/E) per share. If, for example, a companys share price is currently 10 a share and the earnings over the last 12 months (a trailing P/E) were 0.50p a share, then the P/E ratio would be a value of 20 (10 divided by 0.50p). Assuming the financial performance of two companies is almost identical, then the company with the lowest P/E ratio costs less per share for the same financial outcome than the one with the higher P/E.
Price-to-Book Ratio (P/B)
The P/B indicates the amount investors are willing to pay for a share of the companys tangible assets, which by definition excludes intangible assets such as goodwill. The investor must first know the book value of all the companys fixed and current assets minus its current and long-term liabilities values which can be obtained from the balance sheet. The ratio is calculated by dividing the total value of the assets by the total number of issued shares. If the resultant ratio is less than 1, it would mean that shares can be bought in that company for less than the book value of its assets.
Debt-to-Equity Ratio (D/E)
The D/E ratio also known as Gearing indicates what proportion of shareholders funds (and some other types of debt such as loans or bonds) are being used to finance the assets of the business. It can also indicate how much money a company can safely afford to borrow over the long term. To determine the D/E ratio, the companys total long term debt is divided by shareholders equity. If a company has total debts of 1,000,000 and shareholders equity of 4,000,000 then the debt/equity ratio would be 0.25 (1,000,000 divided by 4,000,000). Where the ratio is higher than 100 the majority of the companys assets are financed through debt: if the ratio is less than 100, then the assets are financed mainly through equity.
Free Cash Flow (FCF)
Free cash flow measures how much money a company has left over after paying its overheads and taxes, making any capital investments and covering its working capital requirements. Knowing the FCF is particularly important to shareholders as it shows the amount of money thats available for dividend payments. FCF also enables the business to buy back shares, reduce or eliminate debt and invest in plant and equipment. The ratio is calculated by subtracting non-discretionary costs such as capital expenditure from the companys operating cash flow and then dividing that figure by the companys market capitalisation and total debt. Strong companies usually show positive free cash flow and the higher the FCF ratio, the better.
The price to earnings growth ratio (PEG)
This is an extended version of the P/E ratio as it takes earnings growth into account. PEG compares a companys P/E ratio to its earnings growth rate to determine whether the shares are undervalued or overvalued. The ratio is calculated by dividing a shares P/E ratio by its projected year-over-year earnings growth rate. So if for example the companys earnings per share the previous year were 15p and projected earnings per share this year are 18p that represents an earnings growth rate of 20%. On that basis if the companys P/E ratio were 30 then the PEG would be 1.5 i.e. 30/20 suggesting that the shares may be overvalued by as much as 50%. Conversely, and as a rule of thumb only, a PEG of less than 1.might suggest the shares are cheap. Generally speaking, the lower the PEG, the better the value, because each module of earnings growth costs the investor less.
Tuesday, July 30, 2013
Banks Reducing Private CMO Exposure
A recent article in the Financial Times noted that banks are increasing holdings of collateralized mortgage obligations (CMO’s), credit instruments that aggregate mortgages into pools. The article noted that banks were increasing holdings of “the sliced-and-diced debt that some blame for the financial crisis.” Later in the article the author noted that some of these instruments were backed by the U.S. government and “generally considered safe.”
A closer inspection of the data shows that all of the growth in CMO holdings comes from the safe, government backed CMO’s. Moreover, banks have been allowing holdings of privately issued CMO’s to run off.
In fact privately issued CMO’s have decreased by 54% from their peak at the end of 2007, and currently represent 1.2% of bank assets, down from 2.7%. During this same period banks grew their holdings of government backed CMO’s to 3.5% of assets, from 1.3% in 2007. It is this growth alone that led to a 21% growth in CMO holdings.
Interestingly, the growth cited in the article looks only at the government backed CMO holdings. By not including the runoff in privately issued CMO’s, it overstates the growth of the entire market. In fact, the overall CMO growth did increase from the end of 2007 to present by 21%; however looking simply at government backed CMO’s for the same period makes growth appear to be 175%.
*The article mentioned appeared in the Financial Times on February 8th under the title “US banks snap up bundled mortgage products”
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A closer inspection of the data shows that all of the growth in CMO holdings comes from the safe, government backed CMO’s. Moreover, banks have been allowing holdings of privately issued CMO’s to run off.
In fact privately issued CMO’s have decreased by 54% from their peak at the end of 2007, and currently represent 1.2% of bank assets, down from 2.7%. During this same period banks grew their holdings of government backed CMO’s to 3.5% of assets, from 1.3% in 2007. It is this growth alone that led to a 21% growth in CMO holdings.
Interestingly, the growth cited in the article looks only at the government backed CMO holdings. By not including the runoff in privately issued CMO’s, it overstates the growth of the entire market. In fact, the overall CMO growth did increase from the end of 2007 to present by 21%; however looking simply at government backed CMO’s for the same period makes growth appear to be 175%.
*The article mentioned appeared in the Financial Times on February 8th under the title “US banks snap up bundled mortgage products”
Monday, July 29, 2013
Finding The Best Bankruptcy Trustee Calgary
Financial hardship is a devastating situation that affects thousands of people every year. There are many reasons for people to find themselves sinking under vast amounts of debt. It could be that the major bread winner of the family lost their job. They could have been involved in an accident or be battling a serious illness. Whatever the reason it is a good idea to work with a bankruptcy trustee Calgary to try and get the situation back on track.
Before things reach crisis point it is vital to meet with a good legal professional. They laws surrounding bankruptcy are very complex and no one should be tempted to try and save money by doing their own paperwork. There are so many terms and conditions that must be met. If any part of the petition is not completed properly it will cause delays and cost the filer even more.
Before filing bankruptcy everyone must understand the implications. Their credit will be severely affected for many years to come. In fact in some cases it can be as long as ten years. This will also have far reaching consequences as the individual will not qualify for lower interest rates. Getting a mortgage may not even be possible for several years and even a simple loan will be more complicated and may require a co signer.
There are some specific types of debt that cannot be discharged by filing for bankruptcy. One of these is student loans. Many people are very surprised to learn this and realise that no matter what they are responsible for this debt. One of the things that can be done is to negotiate a zero percent interest rate. A good attorney will be able to help with this
Couples often wonder how their lives will be affected should one of them go bankrupt. Any accounts or credit cards with both names will be the joint responsibility of both parties. In a situation where the couple have already split up, it is important for their finances to be separate. They should both ensure that they close all joint accounts and open individual ones to limit their liability.
When a family has no other options but to file for bankruptcy they will be allowed to keep their clothing. They will also be able to keep a car or other vehicle that is valued under five thousand dollar. This enables them to keep getting to work and maintain their family life. Any necessary medical equipment can also be kept.
Many people wonder how their partner or spouse will be affected. For example join credit card balances and other loans. The law holds both people liable for the debts and this can be particularly difficult if a couple have separated. One spouse may be struggling to make ends meet whilst the other runs up debts. In these cases it is important for the person to have their name removed from any accounts they are no longer using.
No one likes to face up to their money problems and many people are embarrassed to seek help. However, these problems do not go away by themselves. Getting help form a bankruptcy trustee Calgary can help anyone get back on their feet much faster. They will put together all the paperwork and if necessary file the for bankruptcy. The client will then be able to move on with their life and plan for a better future.
Before things reach crisis point it is vital to meet with a good legal professional. They laws surrounding bankruptcy are very complex and no one should be tempted to try and save money by doing their own paperwork. There are so many terms and conditions that must be met. If any part of the petition is not completed properly it will cause delays and cost the filer even more.
Before filing bankruptcy everyone must understand the implications. Their credit will be severely affected for many years to come. In fact in some cases it can be as long as ten years. This will also have far reaching consequences as the individual will not qualify for lower interest rates. Getting a mortgage may not even be possible for several years and even a simple loan will be more complicated and may require a co signer.
There are some specific types of debt that cannot be discharged by filing for bankruptcy. One of these is student loans. Many people are very surprised to learn this and realise that no matter what they are responsible for this debt. One of the things that can be done is to negotiate a zero percent interest rate. A good attorney will be able to help with this
Couples often wonder how their lives will be affected should one of them go bankrupt. Any accounts or credit cards with both names will be the joint responsibility of both parties. In a situation where the couple have already split up, it is important for their finances to be separate. They should both ensure that they close all joint accounts and open individual ones to limit their liability.
When a family has no other options but to file for bankruptcy they will be allowed to keep their clothing. They will also be able to keep a car or other vehicle that is valued under five thousand dollar. This enables them to keep getting to work and maintain their family life. Any necessary medical equipment can also be kept.
Many people wonder how their partner or spouse will be affected. For example join credit card balances and other loans. The law holds both people liable for the debts and this can be particularly difficult if a couple have separated. One spouse may be struggling to make ends meet whilst the other runs up debts. In these cases it is important for the person to have their name removed from any accounts they are no longer using.
No one likes to face up to their money problems and many people are embarrassed to seek help. However, these problems do not go away by themselves. Getting help form a bankruptcy trustee Calgary can help anyone get back on their feet much faster. They will put together all the paperwork and if necessary file the for bankruptcy. The client will then be able to move on with their life and plan for a better future.
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Read more about The Advantages Of Using A Bankruptcy Trustee Calgary visiting our website.
Sunday, July 28, 2013
Existing Home Sales Fell in February
Existing home sales fell by 0.9% to 4.59 million annual units in February. The decline is due to a strong upward revision in January’s sales, as February’s pace is stronger than January’s initially reported pace. January’s pace of home sales was revised up from 4.57 million units per year to 4.63 million. As a result, despite February’s slight decline, sales are running 4% faster in the three months ending February than the three months ending in November.
Months’ supply of homes on the market increased to 6.4 million however part of this increase was due to increased listings. The median house price appreciated in February by 0.3% versus a year ago to $156,600. After adjusting for seasonal factors the appreciation of prices was 1.6% from the previous month.
Read the report.
ReadThe RestEntry..
Months’ supply of homes on the market increased to 6.4 million however part of this increase was due to increased listings. The median house price appreciated in February by 0.3% versus a year ago to $156,600. After adjusting for seasonal factors the appreciation of prices was 1.6% from the previous month.
Read the report.
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