PE, EPS, PEG FACTOR etc.

[prosperity]

I would like to achieve a greater understanding of P.E ,P.E multiples, the relationship between EPS,PE and shareprice and how to analyse whether a stock is good buying or not when using these.Are there any books or websites that explain them in reasonably simple terms?I often read your posts where you discuss PE and there multiples on various shares but don't fully understand your reasonings,but would like too.Hope someone could help.

[brother coy]

ya sucker takes somes asdvice theres all overated hahaahaha
anyways my 2 cents worth hahhaaa

FUNDAMENTAL ANALYSIS



At its broadest, Fundamental Analysis studies any data that might be expected to impact the price or perceived value of a stock, other than analyzing the trading patterns of that stock itself.

Fundamentals include economic factors, industry-specific trends, capital market conditions, and company-specific data and qualities. Within fundamental analysis lie the equally broad concepts of quantitative analysis, where economic or company-specific numerical data are analyzed with computer software and other objective means, and qualitative analysis, which examines less tangible concepts such as technology strength and management effectiveness.

Quantitative Factors

A wide range of ratios are used in fundamental analysis, including such income statement data as Sales, Operating costs, Pre-tax profit margin, Apparent tax rate, Net profit margin, Return on equity (ROE), Cash flow, and Earnings (or Income) per share (EPS). On the balance sheet, quantitative measures include various asset and debt ratios, as well as the capital structure of the company.

In brief, some common company-specific fundamental quantitative measures and their basic calculations are as follows:

Balance Sheet Ratios

Working capital (current) ratio: current assets / current liabilities; a higher number is generally good, although a ratio higher than 5:1 may indicate an unnecessary accumulation of funds or inventories.

Quick ratio: (current assets – inventories) / current liabilities; removing inventories from the Current ratio determines the company’s ability to pay down debt with liquid assets (cash) at a moment’s notice.

Asset coverage: Shows the net tangible assets of the company per $1,000 of total debt outstanding; usually a company should be possess at least $1,500 to $2,000 of net tangible assets for each $1,000 of debt.

Debt-equity ratio: total debt outstanding / book value of equity; generally a company should not have more than half to 1 ½ debt to book value.

Interest coverage: Measures the company’s ability to pay the interest on its debt with its earnings; most companies should have earnings covering at least two to three times its interest payments in any given fiscal year.

Dividend coverage: Adds dividends to the denominator of the Interest coverage ratio, such that the Dividend coverage ratio measures the ability of a company to pay both interest AND dividends from its earnings.

Income Statement Ratios:

Profit margins: Gross profit margin is calculated as (net sales – cost of goods sold) / net sales; and indicates the company’s efficiency in turning over (selling) goods at a profit. Operating profit margin and Net profit margin are calculated similarly to gross profit margin, but consider net sales after taxes, and net earnings respectively, in the numerator of the equation.

Return on equity: One of the most important ratios for common shareholders, return on equity is calculated as net earnings / common equity. Return on equity demonstrates the level of profit that the company has generated from common shareholders’ equity.

Value Ratios:

This class of ratios considers the market price of a stock in relation to various data from the company’s financial statements. Value ratios are the best determinants of the market’s collective opinion of the inherent value of the company.

Price-Earnings Ratio (PE Multiple): Current market price / earnings per share (latest 12 months); the PE ratio is perhaps the most common measure used to compare stocks within particular industries and over time, and is probably the most useful, as it effectively combines all other ratios in one figure. PE Ratios are often based on analyst projections of a company’s earnings for the subsequent 12 month period, or longer.

Qualitative Analysis:

Qualitative factors include any given number of “intangible” factors that cannot easily be measured with numerical data (although analysts will often att

[OldRider]

PROSPERITY: try this link (http://www.investopedia.com/terms/p/price-earningsratio.asp).
This will give PE ,you should be able to find from there any other terms you require.From my experience every little bit of knowlege can help,no holy grail exists,and all is fallible,it's just your chances keep on improving.

[Prophet]

Gee Bro Coy do you have the authors name or their brokerage firm for that fine quote?

[Mr Murphy]

Hi Pros

Read "The Warren Way" by Robert Hagstrom. Talks about techniques on valuing a company etc. Does not talk about technical analysis as he does not use this, focuses more on identifying quality companies that are selling at a discount and purchasing with a long term view. Also do a goggle search on Warren Buffet and there are many articles on the net that discuss his investment style.

If you go to his company website www.berkshirehathaway.com/ you can read their annual reports that Warren Buffet has written. In each of the years annual reports Buffet writes about how he has evaluated a company for purchase, his thinking around purchasing shares etc. his annual reports are usually around 70 pages and packed with info (happy reading)

Cheers
Murph

[Risk]

quote:Originally posted by prosperity

I often read your posts where you discuss PE and there multiples on various shares but don't fully understand your reasonings,but would like too.

The reasoning for using PE and other Fundamental analysis formulas, is to try and measure a company's growth prospects, so that you can determine if the current share price is cheap or expensive relative to that growth.

If you take two companies with the same shareprice, and one is growing faster than the other, then in the long term, you would expect the faster growing one to have a higher shareprice.
(This is assuming that the market is efficient, and will eventually find the true value of a company...but thats another issue)

Its a good thing to learn all you can about the markets, but keep in mind that even fundamental analysis is working on historic data, so as Oldrider wisely pointed out: "All is fallible" indeed.

Some people like using formulas like these, some like to use charts, some use both methods, and some even use neither!
(I think brothercoy is a good example of the latter method...and I mean that in a good way...Im not sure if he uses astrology, black magic, or insider knowledge...but HQP might yet hit the $1 mark! )

[Awryly]

Have a look at this site, P. http://www.investopedia.com/dictionary/

[stormrose]

Yeah PE's a bit of a tricky one: "acceptable" PE changes depending on the industry sector you look at, and then again depending on the age of the company (startup, growth, stable/maturity, dying).

PE is meant to be a measure of investor confidence in a stock. PEG looks at how much PE (and thus by extension investor confidence) is growing or shrinking.
If you believe PE, then try adjusting PEG against the growth in the market index - this should filter out any +ve PEG that is simply due to more money moving into the market. But then PEG always struck me as a fundy attempt at TA, yep it's a hybrid indicator.

Personally I use PE as one query term in a search to narrow down stocks and then I dig further using other methods.

[prosperity]

Thanks everyone for your assistance. Thats given me plenty to go on with. Hopefully soon I might be able to communicate at your more knowledgeable level. Onward and upward.

[rotsevni]

quote:Originally posted by stormrose

PE is meant to be a measure of investor confidence in a stock. PEG looks at how much PE (and thus by extension investor confidence) is growing or shrinking.


Are PEG ratios anywhere to be found or does every trader have to come up with his own estimate?

[rmbbrave]

As far as I know you have to calculate your own.

AS an example here is Ryman's Peg Ratio.

I got the EPS from the Annual report for 2004. Getting several years of EPS is the hardest part.


The EPS is the second figure and the % Growth in EPS the third.

2004 18.4 20.3%
2003 15.3 37.8%
2002 11.1 -21.3%
2001 14.1 11.9%
2000 12.6 404%
1999 2.5

I ignored the 404% growth for 1999 - 2000.
The average growth rate for 2000 - 2004 was 12%

The PEG RATIO is Price/Earnings Ratio divided by Annual EPS Growth

17 divided by 12 is a Peg Value of 1.41


Interpreting the Peg Value

0.50 or less is Undervalued
0.50 to 1.00 is Fairly Valued
1.00 to 1.30 is Richly Valued
1.30 or more is Potentially Overvalued

This would suggest that Ryman with a value of 1.41 is overvalued. But I'm not selling yet!

[glennj]

I don't really rate the "Peg" ratio other than being of minor use and now seldom bother to calculate it.

Suggest you dabble with price/sales ratios which are far more useful.
A book to read is Super Stocks by Fisher. Also What Works on Wall Street by O'Shaunassy. The latter book has the results of the evaluation of different stock selection methods.

[craic]

Rmbrave, just a note of caution. yuou can't average percentages. It creates a nonsense. Herald journos do it at times but they are something else.

[stephen]

glennj, are you aware that O'Shaughnessy's own funds all underperformed the market, and that after about 5 years the new managers of his funds abandoned his methods? It turns out that his books were popular enough that everyone cottoned on, and now his strategies don't work anymore. (Source: Jason Zweig's updated edition of Graham's Intelligent Investor).

[glennj]

Hi Stephen, I'm unaware of details of O'Shaunassy funds selection criteria or their performance. What I do know is that I've studied his published research & adopted aspects such as the price sales ratio in combination with other screens and been very successful.
Many others such as Dreman have also found the p/s ratios to be particularly useful. He's certainly been a top manager.

I was suggesting that there are more useful ratios than "peg" about.

[stephen]

Cool. I'm not knocking the guy either, although you may think that - just pointing out that by nature these relationships can't hold once commonly known and followed.

Also, the NYSE and the NZX are different beasts; quite possibly people who trade on the NZX are not the same as their NY counterparts.

I would be most curious to know what you regard as successful screens though. I personally am looking for something like this these days:
- big discrepancy between current EPS/cost of capital (so called earnings power value)
- big discrepancy between NTA and price

When I say EPS, I mean one calculated by me and adjusting for non-cash items, one offs and other tomfoolery. I think this is where the price/sales thing comes in - companies can easily shag with earnings figures, but sales are sales, so I certainly see the merit in that approach.
- historical record of consistent positive earnings
- historical record of dividend payment

"PEG" to me is just a rough and ready way of saying whether the PE is related to a trend of increasing earnings. You'd use it to identify candidates, but it would be an initial screen, not a deciding factor.

[rotsevni]

quote:Originally posted by stephen

Cool. "PEG" to me is just a rough and ready way of saying whether the PE is related to a trend of increasing earnings. You'd use it to identify candidates, but it would be an initial screen, not a deciding factor.


Sounds like a lot of work for something which is only an initial screen. Wouldn't this be a good forum for people to share the work around and compare each others numbers then? Seems to me this info is not worth being precious about and sharing the work just makes plain sense.

[glennj]

Stephen I don't agree that once something is commonly known and followed that it will stop working. ie Value/Contrarian investment methods still work and they've been known for decades. I do take the point that the more competition using the same style shortens the timespan of bargains remaining bargains.

Re calc of ratios etc we appear to do some similar things. NTA/Price is something I look at but don't give a heavy weighting. It is earnings rather than breakup value that is usually of interest.
You asked about what screens I use. Three of the more important screens from an involved stock selection process are price/sales ratio, return on equity and dividend.