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Sunday, 4 December 2011

How to read the report card of a company


If you want to analyze the company's fundamentals and the report card of a company, you need to know some metrics.
Following are some very best metrics to tell you about the company 1.EPS(Earn per share)
2.P/E(Price earning ratio)
3.Face value
4.Net profit Margin
5.Bonus shares
6.Dividends
7.Sales

EPS(Earn per share): EPS is the amount of earnings per each outstanding share of a company's stock.
Comparing the earnings of one company to another doesn't make any sense because the two companies have a different number of outstanding shares.

EPS=(Net Earnings-Dividends on Preferred stock)/Out Standing Shares.

There are three types of EPS.
1. Trailing EPS: last years number and the only actual EPS.
2.Current EPS: This year numbers which are still projections.
3.Forward EPS: Further number, which are obviously projections.
EPS is helpful in comparing one company to another, assuming they are in the same industry. But it doesn't tell you whether it is a good stock to buy or not.

P/E ratio(Price earning ratio): P/E is the most popular metric of stock analysis. It looks at the relationship between the stock price and the company's earning.It gives you an idea of what the market is willing to pay for the company's earnings.
P/E Ratio=Stock Price(Market Value per Share)/EPS(Earn per share).
A high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with lower P/E.
It would not be useful for investors using the P/E ratio as a basis of their investment to compare the P/E ratio of a technology company(high P/E) to a Utility company(low P/E) as each industry has much different growth prospects.
many investors think that the lower P/E always a better investment than a stock with a higher one. But it is wrong. It always depends. P/E ratio's tend to vary from industry to industry. Mature industries which have more moderate growth potential have lower P/E ratios than company's in relatively young,quick growing industries with more robust future potential.

Face value:Face value is the real value of the share offered in the primary market and shown on the certificate.Face value is fixed by the company.In the case of Common stock face value is largely symbolic. In the case of preferred stocks, dividends may be expressed as a percentage of face value.
The issuing company promised not to issue further shares below face value, So investors could be confident that no one else was receiving a more favorable issue price.
The face value is a nominal value of a security which is determined by an issuing company as a minimum.

Net profit Margin(%): Net Profit Margin tells you how much profit a company makes for every $1 it generates in revenue(or)sales.Profit Margin is an indicator of a company's pricing strategies and how well it controls costs.

Net Profit Margin =(Net income after taxes/revenue)*100.

Higher profit margin indicates a more profitable company that has better control over its costs.
Increased earnings does not mean that the profit margin of a company improving. For instance ,if a company has costs that have increased at a greater rate than sales. It leads to a lower profit margin. This is an indication that costs need to be under control.

Bonus shares: When the additional shares are allotted to the existing share holders with out receiving any additional payments from them. It is known as issue of Bonus Shares.
Issue of Bonus shares results in the conversion of the company's profits into Share Capital.
Bonus issue tends to bring the market price per share with in a more reasonable range.
It increases the number of outstanding shares. This promotes more active trading.
Share Holders regard a bonus issue as a strong indication that the prospects of the company have brightened and they can reasonably look for an increase in total dividends.
it improves the prospects of raising additional funds.

Dividends:Stock dividend is distribution of profit among the investors as share rather than cash which increases the ownership right of holder of shares as well. Dividend giving stock are normally a healthy stock.

Sales: If the sales of a company increases then their net profit margin increases. The company's which have growth rate of 15 % every year then they are called growth stocks.

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