Zebu blog

Tag: Company Analysis

  • P/E Ratio and How To Use It

    When determining a company’s value, the price-to-earnings (P/E) ratio compares its current share price to its earnings per share (EPS). Along with P/E, the term “price multiple” or “profit multiple” can be used to describe the P/E ratio.

    When comparing apples to apples, investors and analysts use P/E ratios to determine the worth of a company’s stock. Comparisons between companies and aggregate markets can be made against each other or over time using this metric.

    To calculate P/E, you can use either a trailing or forward-looking approach.

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    Formula and Calculation for the P/E Ratio

    The following is the formula and calculation utilised in this process.

    Divide the current share price by the earnings per share to get the P/E ratio (EPS).

    If you type in a stock’s ticker symbol into any financial website, you’ll get the current stock price. However, this is a more concrete value that shows what investors currently have to pay for the shares.

    In general, there are two kinds of EPS. “TTM” stands for “trailing 12 months” and helps investors understand the company’s valuation over the last year. It’s common for a company’s results report to provide EPS forecasts. It is a This is the company’s best educated forecast as to how much money it will make in the future. The trailing and projected P/E ratios are based on different versions of EPS.

    Understanding the Price-to-Earnings (P/E) Ratio

    An investor’s and an analyst’s favourite way to estimate a stock’s value is through its price-to-earnings ratio (P/E). The P/E essentially tells an investor if a stock is overvalued or undervalued. Additionally, the P/E ratio of one company can also be compared to that of other companies in its industry or the Nifty 50 Index.

    Analysts that are interested in long-term valuation patterns may use the P/E 10 or P/E 30 measures, which average earnings over the previous 10 or 30 years, respectively. Because these longer-term measurements can correct for changes in the business cycle, they are frequently used when trying to judge the overall worth of a stock index.

    When determining if a company’s share price appropriately represents projected earnings per share, analysts and investors look at its P/E ratio.

    Forward Price-to-Earnings Ratios

    These two forms of EPS measures are used to calculate the two most prevalent P/E ratios: forward and trailing P/E. The sum of the last two actual quarters and the estimates for the future two quarters is a third, less typical form.

    Instead of using trailing figures, the forward (or leading) P/E employs future earnings guidance. This forward-looking measure, also known as “estimated price to earnings,” is useful for comparing current earnings to future earnings and for providing a clearer image of what earnings will look like—without modifications or other accounting adjustments.

    However, the forward P/E metric has flaws, such as firms underestimating earnings in order to surpass the predicted P/E when the next quarter’s results are released. Other corporations may overestimate their forecast and then adjust it in their next earnings report. Furthermore, outsider analysts may make forecasts that differ from those provided by the corporation, causing confusion.

    Trailing Price-to-Earnings Ratio (P/E)

    By dividing the current share price by total EPS earnings over the last 12 months, the trailing P/E is calculated. It’s the most often used P/E ratio since it’s the most objective—assuming the company honestly reported earnings. Because they don’t trust other people’s profits projections, some investors prefer to look at the trailing P/E. However, the trailing P/E has some flaws, one of which is that past performance does not always predict future behavior.

    As a result, investors should make investments based on future earnings potential rather than historical performance. It’s also a concern that the EPS number remains constant while stock values change. The trailing P/E will be less representative of those changes if a major company event sends the stock price much higher or lower.

    Because earnings are only reported once a quarter, while stocks trade every day, the trailing P/E ratio will alter when the price of a company’s shares fluctuates. As a reason, the forward P/E is preferred by some investors. Analysts expect earnings to rise if the forward P/E ratio is lower than the trailing P/E ratio; if the ahead P/E is greater than the current P/E ratio, analysts expect earnings to fall.

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  • Fundamental Analysis 101 – 5 Things To Get You Started

    Fundamental analysis is about getting to know a company, its business, and its future plans better. It includes reading and analysing annual reports and financial statements to get a sense of the company’s strengths and weaknesses, as well as its competitors.

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    A few of the important parameters while doing fundamental analysis are:

    1. Net Profit
    Net profit can mean different things to different people. Net means “after all the deductions.” It’s common to think of net profit as profit after all the operating costs have been taken out, especially the fixed costs or overheads. Gross profit gives investors the difference between sales and direct costs of goods sold before operating costs or overheads are taken into account. This is not the case here. It is also called Profit After Tax (PAT), which is the profit figure that is left after taxes are taken out of the profit.

    2. Profit Margins
    The earnings of a company don’t tell the entire story. Earning more money is good, but if the cost goes up more than the revenue, the profit margin doesn’t get better. The profit margin shows how much money the company makes from each rupee of sales. This measure is very useful when you want to compare businesses in the same industry.
    On the basis of a simple formula:
    Net income / Revenue = Profit margin
    In this case, a higher profit margin means that the company is better able to control its costs than its competitors are. The profit margin is shown in percentages.
    If a company makes 10 paise for every rupee they make, then the profit margin is 10%. This means that the company makes 10 paise for every rupee they make.

    3. Return on Equity Ratio
    Return on Equity (ROE) shows how well a company does at making money. It is a ratio of revenue and profits to the value of the company’s stock. Find out how much profit a company can make with the money its shareholders have put into it. A simple way to do this is to look at the return on equity ratio,

    The Return on Equity Ratio is calculated as shown.

    Return on equity = Net Income / Shareholder’s Equity

    It is calculated in rupees.

    This factor is important because it tells you about a lot of other things, like leverage (debt of the company), revenue, profits and margins, returns to shareholders.

    For example, a company called XYZ Ltd. made a net profit (before dividends) of Rs. 1,00,000. During the year, it paid out dividends of Rs. 10,000. XYZ Ltd. also had 500, Rs.50 par common shares on the market during the year, as well. That’s how the ROE would be calculated then.

    ROE = 1,00,000–10,000/500*50 = Rs. 3.6.

    Simply put, those who own shares in the company will get back Rs. 3.6 for every rupee they invest in the company.

    4. Price to Earnings (P/E) Ratio

    People often use the Price-to-Earnings (P/E) ratio to figure out how much a share of a company is worth. It tells us how much money the company makes per share in the market today.
    We can figure out the Price of earnings, or PE ratio, as shown below.
    In simple terms, PE = Price per Share / Earnings per Share
    This also helps when you want to compare businesses. Then companies should figure out their EPS and then figure out how much their PE ratio value is.
    A high P/E means that the stock is priced high compared to its earnings. Companies with higher P/E seem to be more expensive. However, this measure, as well as other financial ratios, must be compared to other companies in the same industry or to the company’s own P/E history to be useful.
    If company XYZ has a share that costs 50 rupees, and its earnings per share for the year are 10 rupees per share.

    The P/E Ratio is 50/10, which is 5.

    5. Price-to-Book (P/B) Ratio
    A Price-to-Book (P/B) ratio is used to compare a stock’s value on the market to its value on the books. Calculating the P/B ratio is the way to figure out if you’re paying too much for the stock because it shows how much money the company would have leftover if it were to close down today.
    P/BV Ratio = Current Market Price per Share / Book Value per Share
    Book Value per Share = Book Value / Total number of shares
    Having a higher P/B ratio than 1 means that the share price is higher than what the company’s assets would be sold for, which means that the share price is higher. The difference shows what investors think about the future growth of the company.

    XYZ company, for example, has 10,000 shares trading at Rs.10 each. This year, the company recorded a net value of Rs. 50,000 on its balance sheet. The price-to-book ratio of the corporation would be as follows:

    50,000 / 10,000 = Book Value per Share

    P/BV Ratio = 10 / 5

    P/BV Ratio = 2

    The company’s market price is two times its book value. This signifies that the company’s stock is worth twice as much as the balance sheet’s net worth. Also, because investors are ready to pay more for the business’s shares than they are worth, this company would be called overvalued.

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  • Questions To Ask Before You Invest In A Stock

    Investing by yourself for the first few times can become very intimidating, very quick. But considering that taking charge of your finances is the way for independence, it is importantto invest wisely and take risks as per your comfort level.

    Before you invest in a company, you need to understand the fundamentals of a business. If you invest without doing your homework, you are simply gambling. We would also suggest that you ignore WhatsApp recommendations, YouTube recommendations or any other opinion you do not trust.

    Another important factor to consider is the platform you use to analyse stocks and start investing. We suggest that you trust one of the best brokerage firms in the country like Zebu. As a top broker in the share market , we have created one of the best stock trading platforms, for you to use and invest.

    So, before you acquire a share in which you want to invest, here are a few questions to ask. Remember, this isn’t research – it’s pre-research. These questions are vital and fundamental – far from complete, but a good place to start!

    What is the company’s line of business? What does the company do?

    You should have a circle of competency if Warren Buffett does. Indigo Airlines is a carrier, Asian Paints is a paint manufacturer, and HDFC Bank is a bank. Well, none of the stuff is really simple to comprehend, but it is simple to express. Do not purchase if you do not understand what a BPCL or a Bajaj Finance is. If you have to buy something, you should know what it does. Before you buy a stock, the first step is to understand what the company does.

    Is the company paying a dividend or, at the very least, paying income tax?

    A retail investor should avoid investing in companies that are yet to generate a profit. Allow venture capitalists to invest in turnaround companies; it is a distinct kind of skill that you, as a beginner, might not have. The company will pay dividends shortly if it is profitable and paying income taxes, so you may relax. To be even safer, only invest in firms that offer dividends. At the very least, you know that the cash flows you witness are real.

    What has been the company’s track record?

    Take a look at the last two years. Examine the quarterly reports, as well as the balance sheet and director’s reports over the previous three years. Check to see if the company could glimpse into the future and foresee what will happen. Take a look at what they said and did. See if you can determine whether the company’s success was due to luck or strategy. It won’t be easy but you can start with the basics of fundamental analysis to understand a few of the company’s numbers.

    What is the Price Earnings that it is quoting?

    A PE of 24 or above is considered excessive. Of course, some companies with a lower PE are accessible, and they may also be growing slowly. So, instead of 24, search for a pe that is about 17. Remember that the market might stay at a new high PE for a long time, leading you to believe that “this is the new normal” — using PE is a double-edged sword, but it’s a good place to start.

    What are the rivals’ names and prices?

    If you’re looking for Asian Paints, you’ll also come across Berger Paints. Coming away thinking “these are two fantastic companies” will be challenging, if not impossible. So, if you notice that the entire industry has a high PE, you might want to reconsider your position on the industry and its valuation. Is this company the market leader in its industry? Is it a niche player in a crowded market? Is it a monopolistic sector dominated by a single corporation, or is it a fragmented industry where even the largest player controls less than 10% of the market, like D’Mart and other supermarkets do? Also, keep an eye on the competitors from other countries.

    Who is in charge of the business?

    You could favour family-owned businesses with competent management and strong family values, such as Cholamandalam and Asian Paints. That isn’t to suggest that ITC isn’t a successful company. Or that Equitas will be poorly administered by a group of pals who have known each other for many years!

    What is the dividend policy?

    If you acquire a PSU share, the government could go after the company for a large payout. As a result, you benefit as well. However, some businesses may elect to preserve a large part for future usage, so be cautious.

    Have you noticed any red signs recently?

    Is a director being charged for failing to pay taxes? any other criminal or social blunders/frauds? In these cases, keep your distance.

    There are 9000 businesses on the stock exchange. Approximately 5000 of them are occasionally spotted. Around 200 have reliable financial statements. Your investment needs could be more than met with these 200 companies. We would also suggest choosing from the top 100 stocks on the NSE or the top 200 stocks on the BSE.

    With these questions as the basis for your investment decisions, the next step is to understand the basics of fundamental analysis. At Zebu, we are working on a short and cript fundamental analysis guide that can help you understand a company. As a top broker in the share market, we have created the best stock trading platform for you to invest wisely. Our tool is designed to help investors and traders analyse a company with a wide range of indicators and screeners as per your strategy. As one of the best brokerage firms in the country, we invite you to open a trading and investment account with us.