On a beautiful sunny day, as you joyfully cruise towards your office, the radio fills your car with your favourite song, bringing a smile to your face. The perfect weather and melodious tunes create a harmonious atmosphere. But as the song ends, a commercial break interrupts the momentary bliss.
The first ad promotes a new real estate project in Noida, enticing you with the idea of a dream home. Then, another ad highlights the benefits of a cooking oil, tempting your taste buds. Finally, a mutual fund ad takes the stage, introducing a new equity mutual fund. However, as the ad concludes, the narrator’s voice suddenly accelerates, cautioning you with a reminder that “mutual fund investments are subject to market risks, read all scheme related documents carefully”.
You always listen to this disclaimer and smile, understanding the importance of the message that should be conveyed before pitching the ad. However, you notice that it is often overlooked, likely due to the fear of discouraging potential investors in equity markets. Nevertheless, you choose to overlook this omission and continue driving smoothly to your office, keeping in mind the timeless advice of Warren Buffett, who famously said, “Risk comes from not knowing what you’re doing.
Investing in markets can be a treacherous task, requiring a careful balance of numbers and emotions. Many individuals begin investing with the intention of making quick and easy money, only to discover that they are the ones who learn the hardest lessons. The market favours those who are well-informed about the risks they are undertaking and are prepared to navigate them wisely.
We will guide our readers on stock analysis and how they can embark on their own investing journey. Stock analysis involves evaluating a stock to determine whether it is worth buying and at what price.
There are two primary methods of stock analysis: Fundamental Analysis and Technical Analysis.
Let’s explore the example you provided to illustrate how EPS can offer a different perspective:
EPS= Net Income/ Average Outstanding Shares
|Net Income (In Rs.)
|Average Outstanding shares
In this case, despite having a higher net income, Company A has an EPS of 5, whereas Company B has an EPS of 10. This means that Company B is generating higher earnings per share compared to Company A, indicating that it may be more efficient in utilizing its shares to generate profits for shareholders.
ROE= Net Income / Shareholder’s Equity
It indicates how efficiently a company is utilizing its equity to generate profits. A higher ROE signifies a more effective use of shareholder investments.
Return on Capital Employed (ROCE) = ROCE = PBIT / Total capital employed
ROCE is a useful metric for comparing profitability across companies based on the amount of capital they use – especially in capital-intensive sectors.Enhanced ROCE can potentially drive valuations and perception.
P/E = Current Market Price of Share / EPS
High P/E depicts an overvalued stock, or investors are expecting high growth in the future.Whereas a company with no P/E ratio means no earnings. P/E is usually seen as a comparison tool among the peer companies.
Dividend Payout Ratio = Dividend Paid or Dividend Per Share / Net Earnings or EPS
The most important aspect indicated by this ratio is the level of maturity and reinvestment opportunities for a company. Old or mature companies tend to pay higher dividends compared to new or young companies. This is because young companies prefer to use their net earnings to reinvest in the business rather than distributing it to shareholders.
Now that you understand both sides of the coin, we advise you to utilize them when buying your next stock and conduct diligent analysis instead of relying on stock recommendations from news anchors and Telegram groups.
At the end, it’s the investor who carries the risk, not the investment – as Robert Kiyosaki wisely said. Therefore, invest wisely!
To assist you in stock analysis, Globe Trade Pro provides users with access to analyse all listed companies on the stock exchange directly from their mobile screens. Click on the link below to download the app: Globe Trade Pro