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Price Earning ratio (P/E) denotes how much amount you need to invest to earn 1 Re in a year. Price is the current market price of the stock & earning is earning per share as per last financials. So lets say, if PE of Maruti is 25, means you need to invest 25 to earn 1 Re. (1/n)
Return on Equity (ROE) means how much % profit an equity shareholder generates on his equity capital. ROE = Net profit after tax / Shareholder equity (2/n)
Return on Capital Employed (ROCE) means how much % return company generates over its Capital Employed. Capital Employed means Debt + Equity. ROCE = Earnings before interest & tax / (Debt + Equity). Consistent Higher ROCE means company can deploy is capital effectively (3/n)
Earning per share (EPS) means Net Income earned per equity share. EPS = Net Income / Equity shares. Difference between Basic & Diluted EPS is that the later one accounts for convertible securities. For eg, Convertible Debentures would be considered as Equity for Diluted EPS (4/n)
Differential Voting Rights (DVR) Shares means they have no voting rights but carry all other features of ordinary equity shares. Tata Motors DVR are trading at 50% discount to ordinary shares. Retailers (who don't vote) may prefer DVR resulting in higher Dividend Yield (5/n)
Dividend Yield means Dividend as a % of current share price. IT companies / Public sector companies usually have higher Dividend yield. Investor seeking regular cash flow from companies may invest in companies having consistent (more than 10 years) Higher Dividend Yield (6/n)
How to check fundamentals of company
1) How long the company has been in business. What are its core competency & its market share & whether market share is increasing?
2) What is its latest EPS & average EPS for last 10 years. Check CAGR of EPS over 10 years. (7/n)
1) How long the company has been in business. What are its core competency & its market share & whether market share is increasing?
2) What is its latest EPS & average EPS for last 10 years. Check CAGR of EPS over 10 years. (7/n)
3) What is its latest PE, whether it is trading below or above 10 years average PE. Compare with PE of companies into same business
4) Check Trend /CAGR of Sales, EBIT, EBT & PAT of company since last 10 years atleast. (8/n)
4) Check Trend /CAGR of Sales, EBIT, EBT & PAT of company since last 10 years atleast. (8/n)
5) Check whether company is generating consistent operating cash flows over last 10 years. Whether the company can invest its Operating cash flow at same ROCE?
6) Check ROCE & ROE of company for last 10 years & its should be higher than 15% atleast. (9/n)
6) Check ROCE & ROE of company for last 10 years & its should be higher than 15% atleast. (9/n)
7) Check Dividend yield of the company & consistency of the same over last 10 years
8) Check future business prospects of the company & sector at large
9) Check integrity of management & whether there has been increase /decrease in promoters holding over last 10 years. (10/n)
8) Check future business prospects of the company & sector at large
9) Check integrity of management & whether there has been increase /decrease in promoters holding over last 10 years. (10/n)
10) Check FII/DII holding of company & its change over last 10 years.
11) Check EV/EBIT of the company over last 10 years
12) Check whether the company is into cyclical business (Auto, Pharma) or capital intensive business (Infra, Telecom, etc). (11/n)
11) Check EV/EBIT of the company over last 10 years
12) Check whether the company is into cyclical business (Auto, Pharma) or capital intensive business (Infra, Telecom, etc). (11/n)
Margin of safety (MOS) means buying a business at value lower than its intrinsic value. When you buy business at low valuations, possibility of stock price further going down is limited. Though it may be difficult to determine intrinsic value based on future cash flow. (12/n)
