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To value a share, you must know certain numbers which are important. To name a few, they are: EPS (earnings per share
DY (dividend yield )
PER or PE (price-earnings ratio)
PSR (price to sales ratio)
NTA or NAV (net tangible asset value)
Gearing (sometimes called debt-equity-ratio) The
PE ratio is the most often talked about. It means the market price per
share divided by the net earnings per share. One way of looking at it,
is that a PE of 4 means that it will take 4 years to recoup your
capital at the current rate of earnings. Is
buying a share at low PE the way to riches? Certainly not. PE alone is
not the way to value a share. Wealth is not so easily created;
otherwise any form five boy can become rich. You need to know very much
more. Sometimes it is better
to buy at high PE than at low PE. When a share is selling at low PE, it
means that the prospective earnings are poor and therefore its
intrinsic value will be lowered. On the contrary, when it is selling at
high PE, it means the prospective earnings are good and therefore
its intrinsic value will be enhanced. It
is better to buy a good company in its bad year rather than a bad
company in its good year. Think about it, and you will know what I mean. Prospective
earnings are forecast earnings which may turn out to be inaccurate.
Hence, if you buy at high PE and your forecast earnings are wrong, the
share price will not go up. On the contrary if you buy at low PE and
earnings per share subsequently drop, your low PE will become high PE,
and the share price will drop also, So you see, it all boils down to
earnings. Fundamental analysts
are paid highly, because they are supposed to possess the ability to
forecast EPS correctly. In reality, sad to say, many failed miserably. “If
you wish to enjoy the glory of the sunrise, you have to slog through
the darkness of the night”. Do your homework, read more, upgrade
yourself, and someday you will be rich. To all my Christian readers, I wish them Merry Christmas and a Happy New Year.
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