Friday, March 21, 2014

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The Stock Market | How to Analyze a Company's Fundamentals

A quick way to know what you are buying using all the results posted on Stock Exchange Market, other than the Annual report includes:
1. You will need to know what kind of investor you are. Short term or Long term?
People usually say for long term, price
doesn't matter, but price do help you maximize your gains and minimize your losses.
2. If u want to buy a stock amongst these lists of stocks for example:
Year End results shown on Stock Exchange Market

Stock A~(INSURANCE)
Outstanding Shares = 2billion units
Current Price=N2
Turnover(2010)=N5.8billion Turnover(2009)=N3.6billion
PBT(2010)=N2.5billion PBT(2009)=N1.1billion
PAT(2010)=N2.1billion PAT(2009)=N700million
Net asset(2010)=N9billion
Net asset(2009)=N7billion
Dividend(2009)=15kobo Dividend
(2010)=50kobo.

Stock B~(TELECOMMUNICATIONS)
Outstanding Shares=6billion units
Current Price=N1
Turnover(2010)=N12billion,
Turnover(2009)=N10billion
PBT(2010)=N4billion, PBT(2009)=N6billion
PAT(2010)=N3.5billion, PAT(2009)=N5.2billion
Net Asset(2010)=N48billion, Net Asset(2009)=N51billion. Dividend(2009)=50kobo, Dividend
(2010)=20kobo.

Stock C(BANKING)
Outstanding Shares=28b units
Current Price=N20
Turnover(2010)=N120billion,
Turnover(2009)=N110billion
PBT(2010)=N50billion, PBT(2009)=N45billion,
PAT(2010)=N40billion, PAT(2009)=N35billion
Net Asset(2010)=N200billion, Net Asset(2009)=N196billion
Dividend(2009)=75kobo, Dividend(2010)=100kobo.

Stock D(OIL AND GAS)
Outstanding Shares=12billion units
Current Price=N80
Turnover(2010)=N220billion Turnover(2009)=N180billion
PBT(2010)=N18billion PBT(2009)=N15billion
PAT(2010)=N10billion, PAT(2009)=N11
Net Asset(2010)=N120billion, Net
Asset(2009)=N110billion
Dividend(2009)=50kobo, Dividend
(2010)=45kobo.

Looking at these examples, you can easily calculate
¤ EPS= PAT/(O/S)
¤ PER= Current price/EPS
¤ BV=Net Assets/(O/S);
¤ Dividend Yield= Current Dividend /Current price * 100%.

Note
• O/S is Outstanding Shares
• PBT= Profit Before Tax
• PAT= Profit After Tax
• PER= Price Earning Ratio
Stock A:
¤ Current EPS=N1.05
¤ Current PER=1.9
¤ BV=N4.5
¤ Dividend Yield=25%
Stock B:
¤ Current EPS=N0.583
¤ Current PER=1.7
¤ BV=N8
¤ Dividend Yield=20%
Stock C:
¤ Current EPS=N1.43
¤ Current PE=14
¤ BV=N7.14
¤ Dividend Yield=5%
Stock D
¤ Current EPS=N0.833
¤ Current PE=96
¤ BV=N10
¤ Dividend Yield=0.5%
What to do:
• Look at the 4 stocks and screen them based on their PER. The ones with lowest PERs pass. So I expect U to pick stock A and stock B.
• Then u look critically at stock A and B (based on the results above as shown on the annual report of the SEM). Look at dividend yields of both and ponder on them. If you buy A now at the current price, you will hold A for 4 years assuming that they keep paying the same dividend and at the end of the 4 years, I will almost have the capital I used in buying A. But if I buy B, I will have to hold 5 years based on the dividend. This then calls for your investment period. How long are you ready to hold seeing such juicy dividend yield!?
• Still looking at the dividend, you will see that for A, there is more than a 200% increase in the dividend paid in 2010 and
the one paid in 2009. For stock B,there is 150% decrease in dividend paid in 2010 and that paid in 2009. You may start thinking that stock A is better.
• Using analysis based on book value(BV), You will find out that while stock A is trading at N2, stock B is at N1. But the worth of the company A is N4.50 while the worth of company B is N8. At this point, If you buy A at its current price, then you are paying N2 for a company worth N4.5. That is 125% discount! However buying B would mean that u are paying N1 for a company worth N8. And that is 700% discount.
The question now is which will you buy? Many things will be considered before buying either A or B or even C.

This is the quickest way to analyze a stock before buying. That is for a lameman. But seasoned investors on SMN don't do this. They sleep with the annual report. It takes them time to analyze the annual report and then come up with what to buy. They look at the debts, receivables, turnover,management, cost control measures and everything about the balance sheet. They even compare years of each report before buying and that is for the seasoned investors.

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