Systematic investment plan for stocks

There are very few points that everybody in this world agrees upon. And the stock market unpredictability is undoubtedly one of them. Even people with several years of experience are not always able to track the stock market dynamics, thus falling prey to faulty decisions.Watertight Stock market investing strategy is something that people consider to be elusive. It is something that can be chased, but probably can never be achieved.

But is it a correct notion? Are things like fate, luck, chance, etc., are the only deciding factors in the stock market investments? Or is there any way to approach the stock market in a speculative manner? The answer to the above question probably lies in the Systematic Investment Plan or SIP (a.k.a. "Periodic Payment Plan" or "Contractual Plan").

Systematic Investment Plan (SIP)

Unlike the one-time investment plans, SIP entails regular payments for a fixed period. It allows investors to garner shares of a mutual fund by contributing a fixed (which is often small) amount of money on a regular basis. And it offers the following advantages readily attractive to any investor.

Reduced Pressure On Your Purse

Through SIP you can enter the stock market even with a paltry investment. Your inability to invest a more-or-less fat amount might have kept you away from investing in stock market. SIP is an ideal solution for your problem.

Building For The Future

We have certain needs that can be addressed only through long-term investments. Such needs include children’s education, buying a house of your own, post-retirement emergencies, etc. And SIP offers precious help in this regard. It helps you to save a small amount on a regular basis. And in due time it turns into a substantial amount.

Compounds Returns

SIP not only helps you reach a substantial amount after a certain period of time. Rather it helps you to reach that amount at an early age, depending when you start investing. You can amass a notable amount at 70 if you start investing at 35. An earlier start at 25 can enable you achieve the same amount by 60.

Lowering The Average Cost

In SIP you experience low average cost, courtesy dollar-cost average. You invest the same fixed dollar amount in the same investment at regular intervals over an extended period of time. You are buying more shares of an investment when the share price is low. And you are buying fewer shares when the share price is high. And it may result in you paying a lower average price per share.

The dollar-cost averaging strategy does not try to time the market. Rather it reduces the risk of investing a larger amount in an investment at a wrong time. And it does the same by spreading your investments out over a period of months, years, or even decades.

Market Timing Irrelevance

The previous two paragraphs tell you that SIP makes the market timing irrelevant for you. The stock market unpredictability and volatility often play a deterrent for wannabe investors like you. In SIP, you are completely free from this problem of wrong timing.

The SIP’s Mode Of Function

A typical SIP entails monthly investments over a period of 10, 15 or 25 years. You are generally allowed to start your investment with a modest sum.

You do not have direct ownership of the funds. Rather you own an interest in the plan trust. The plan trust invests the investor's regular payments, after deducting applicable fees, in shares of a mutual fund.

Things That You Should Make Clear Before Investing In SIP

You should make certain things clear to yourself before going for an SIP investment. They include the following:

1. You should be confident about continuing to make payments for the term of the plan. Withdrawal in the mid way will almost certainly make you lose your money unless you are eligible for a full refund.

2. Check the fees charged by the plan. Also check the circumstances under which the plan waives or reduces certain fees.

3. Study the plan’s investment objectives. Take a note of the risks of investing in the plan. And check whether you are comfortable with them.

4. Check your statutory rights to a refund in case you cancel your plan. You can post your comments on the articles in this blog.

If you have any queries regarding any thing then reach me at kaliki.srikanth@gmail.com

If you are beginner to stock market the start reading from the first article http://rupeedreamsindia.blogspot.com/2008/03/what-is-investing.html

Is it time to invest in indian markets ?

The Indian stockmarket, along with the world markets, are currently facing challenging times. Worsening subprime crisis, slumping dollar, rising commodity prices especially crude and food and the slowdown of the US economy has led the indices to shed considerable losses and revert to the levels seen last year.

In this article, we shall take a look at how some of the sectoral indices have performed in the last three months.

Company Price on Jan 18,2008 (Rs) Price on Mar18,2008 (Rs) Change
BSE Sensex 19,014 14,995 -21.1%
BSE Bankex 11,372 7,495 -34.1%
BSE Capital 18,334 13,095 -28.6%
BSE Auto 5,148 4,398 -14.6%
BSE IT 3,791 3,370 -11.1%
BSE Healthcare 4,025 3,671 -8.8%
BSE FMCG 2,303 2,142 -7.0%

As seen from the table, the Sensex is down 22% with the BSE Bankex being the worst performer, and BSE FMCG index registering the least losses.

Banking: The ongoing credit crises have impacted the banking sector across the world. The collapse of the subprime mortgage market wiped out almost US$ 100 bn of value from the three biggest US banks in the past six months.

In India, though the banks do not have direct exposure to subprime, they have overseas exposure in credit derivative products through companies and therefore have to bear the brunt of mark to market losses.

ICICI Bank has reported marked-to-market losses of US$ 264 m in its overseas operations on account of its exposure to credit derivatives and investments at the end of January 2008. Even SBI and Bank Of Baroda have some exposure and the stocks have plunged 30% and 45% respectively since Jan 2008. The Rs 600 bn debt relief package announced in the budget was also instrumental in adding fuel to the fire.

Capital goods: There was significant heating up in the sector, leading to overvaluation of stocks in the past one year. Hence, any correction was imminent.

However, with the global liquidity crunch, corporates would find it difficult to raise capital for their execution plans, thereby affecting their performance.

Further, even the recent IIP numbers (2.1% in Apr 07-Jan 08 as against 16.3% in the corresponding period last year) led to the negative sentiments for the sector.

Auto: The sector, whose contribution to employment is among the highest, has not had a good run on the bourses. This can be attributed to the fact that the companies from the sector are facing pressure both on the costs as well as revenues front. The only exception could be passenger cars where volumes have seen a positive growth rate.

However, in the case of two-wheelers and CVs, higher interest rates and lack of adequate credit have meant that buyers have stayed away. Furthermore, spiraling prices of commodities have also impacted cost structures in a big way.

We believe that the sectoral index will have to put up with some more agony in the near term as there seems to be no relief on the horizon either in the form of lower interest rates or softening of commodity prices. The excise duty cuts recommended in the latest budget are also not having the desired impact.

Software: Even before the chaos had started in the Indian markets, the software sector was the worst hit on account of the appreciating rupee. And even now it continues to face pressure. The reason for the same can be attributed to the impending slowdown of the US economy.

The BFS (Banking and Financial Services) sector is the largest spender in IT in the US. With the ongoing credit crisis in the US, the spending on the BFS front is likely to reduce. Also, with the expected slowdown in the US, Indian IT companies have downgraded their volume growth for the coming quarters. Though the rupee has stabilized against the dollar in recent times, the overall scenario looks bleak.

Pharma and FMCG: Both the sectors are of defensive nature. This is because even in times of recession, people would continue to use daily products and medicines. With increasing income, growing consumerism and health awareness, the growth of these two sectors is expected to be robust. Also, given that the budget has been beneficial to these sectors, the outlook looks positive.

Summing it up…
Equities are a risky asset class. The last three months have indicated how volatile stock markets can be. However, as history has shown, while sentiments affect performance over a short period of time, in the long term, it is the fundamentals, which finally gets it going.

Hence, the weakness in the stockmarkets at present should be looked upon as an opportunity to invest in good quality stocks with strong fundamentals, sound managements and reasonable valuations from a long-term perspective.

8 investing tips in equities

The stock market 'meltdown' witnessed since the start of Jan 22nd 2008 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks.

it is primarily the retail/small investor community, which gets affected the worst as they are generally among the late entrants to a bullrun (i.e. near the peak) and amongst the last to exit in a correction. However, some amount of stock market prudence and a disciplined approach could go a long-way in protecting one's capital. Listed below are a few points.

1. Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles.

By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-popping returns, it must be noted that these stocks have the potential to wipe out almost the entire invested capital. Another way greed affects investor behaviour is when they buy/hold stocks above the price justified by its fundamentals.

Similarly, in a vice-versa scenario (bear market), investors must control their fear when stock markets turn unfavourable and stock prices collapse. Panic selling would serve no purpose and if the company has strong fundamentals, the stock is more than likely to bounce back.

It is apt to note here what Warren Buffet, the legendary investor, had to say when he was asked about his abstinence from the software sector during the tech boom, "It means we miss a lot of very big winners but it also means we have very few big losers.... We're perfectly willing to trade away a big payoff for a certain payoff".

2. Avoid trading/timing the market: This is one factor, which many experts/investors claim to have understood but are more often wrong than right. We believe that it is rather impossible to time the market on a day-to-day basis and by adopting such an approach, an investor would most probably be at the losers' end at the end of the day.
In fact, investors should take advantage of the huge volatility that is witnessed in the markets time and again.

In Benjamin Graham's (pioneer of value investing and the person who influenced Warren Buffet) words, "Basically, price fluctuations have only one significant meaning for the 'true' investor. They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market".

3. Avoid actions based on rumours/sentiments: Rumours are a part and parcel of stock markets, which do influence investor sentiments to some extent. However, investing on the basis of this could prove to be detrimental to an investors' portfolio, as these largely originate from sources with vested interests, which more often than not, turn out to be false. This then leads to carnage in the related stock(s) leaving retail investors in the lurch.

However, if we consider this from another point of view, when sentiments turn sour but fundamentals remain intact, investors could take the opportunity to build a fundamentally strong portfolio. This scenario is aptly described by Warren Buffet, "Be fearful when others are greedy and be greedy when others are fearful".

4. Avoid emotional attachment/averaging: It is very much possible that the company you have invested in fails to perform as per your expectations. This consequently gets reflected on the stock price.

However, in such a scenario, it would not be wise to continue to hold onto the stock/buy more at lower levels on the back of expectations that the company's performance may improve for the better and the stock would provide an opportunity to exit at higher levels.

Here it is advisable to switch to some other stock, which has promising prospects. In Warren Buffet's words, "Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks".

5.Avoid over-leveraging: This behaviour is typical in times of a bullrun when investors invest more than what they can manage with the hope of making smart returns on the borrowed money. Though this move may sound intelligent, it is smart only till the time markets display a unidirectional move (i.e. northwards).

However, things take a scary turn when the markets reverse direction or move sideways for a long time. This is because it leads to additional margin calls by the lender, which might force the investor to book losses in order to meet the margin requirements.

In a graver situation, a stock market fall could severely distort the asset allocation scenario of the investor putting his other finances at risk.

6.Keep Margin of Safety: In Benjamin Graham's words, "For ordinary stocks, the margin of safety lies in an expected 'earning power' considerably above the interest rates on debt instruments".

However, having a stock with a high margin of safety is no guarantee that the investor would not face losses in the future.
Businesses are subject to various internal and external risks, which may affect the earnings growth prospects of a company over the long-term.

But if a portfolio of stocks is selected with adequate margin of safety, the chances of losses over the long term are minimised. He further points out, "while losing some money is an inevitable part of investing, to be an 'intelligent investor,' you must take responsibility for ensuring that you never lose most or all of your money."

7.Follow research: The upswing in the stock markets attracts many retail investors into investing into equities. However, picking fundamentally strong stocks is not an easy task.

In fact, it is even more difficult to identify a stock in a bullish market, when much of the positives are already factored into the stock price, making them an expensive buy.

It is very important to understand here that owning a stock is in effect, owning a part of the company. Hence, a detailed and thorough research of the financial and business prospects of the company is a must.

Given the fact that on most occasions, research is influenced by vested interests, the need of the hour is unbiased research. Information is power and investors need to understand that unless impartially represented (in the form of research) it could be misleading and detrimental in the long run.

8.Invest for the long-term: Short-term stock price movements are affected by various factors including rumours, sentiments, market perception, liquidity, etc, however, in the long-term, stock price tends to align themselves with its fundamentals.

Here it must be noted what Benjamin Graham once said, "...in the short term, the market is a 'voting' machine (whereon countless individuals register choices that are product partly of reason and partly of emotion), however in the long-term, the market is a 'weighing' machine (on which the value of each issue (business) is recorded by an exact and impersonal mechanism)."

Of course, it must be noted that the above list is not exhaustive and there may be many more points that an investor needs to understand and follow in order to be a successful investor.

Further, the above points are not just a read but needs to be practiced on a consistent basis. While making wealth in the stock markets was never an effortless exercise, it becomes all the more difficult when stock markets/stock prices are at newer highs.

Top Investment Tenets For Rupee Millionaire

Michael Steinhardt was a prominent hedge fund manager of the 1970s. There were few investment instruments over which he did not wield mastery.

He formed a hedge fund company along with Howard Berkowitz and Jerrold Fine. Under Steinhardt’s direction, the firm was consistently successful in identifying macro market moves and then fitting its securities trading strategies into these situations.

Steinhardt and his partners achieved a performance track record that still stands out on Wall Street: 24 per cent compound average annual returns — more than double the S&P 500 — over a 28-year period.

What is more amazing is that Steinhardt accomplished this record with stocks, bonds, long and short options, currencies and time horizons ranging from 30 minutes to 30 days.

Below are his few quotable quotes:

“One dollar invested with me in 1967 would have been worth $481 on the day I closed the firm in 1995, versus $19 if it had been invested in a Standard & Poor’s index fund.”

“I always used fundamentals. But the fact is that often, the time frame of my investments was short-term.”

“I do an enormous amount of trading, not necessarily just for profit, but also because it opens up other opportunities. I get a chance to smell a lot of things. Trading is a catalyst.”

“One of the advantages of trading the way I do — being a long-term investor, short-term trader, individual stock selector, market timer, sector analyst — is that I have made so many decisions and mistakes that it has made me wise beyond my years as an investor”.

“Anyone who thinks he can formulate a success in this market is deluding himself because it changes too quickly. As soon as a formula is right for any length of time, its own success carries the weight of its inevitable failure.”

Michael Steinhardt’s top investment tenets are:

Make all your mistakes early in life. The more tough lessons early on, the fewer errors you make later.

Always make your living doing something you enjoy.

Be intellectually competitive. The key to research is to assimilate as much data as possible in order to be to the first to sense a major change.

Make good decisions even with incomplete information. You will never have all the information you need. What matters is what you do with the information you have.

Always trust your intuition, which resembles a hidden supercomputer in the mind. It can help you do the right thing at the right time if you give it a chance.

Don’t make small investments. If you’re going to put money at risk, make sure the reward is high enough to justify the time and effort you put into the investment decision.

8 key ratios for picking good stocks

The following 8 financial ratios offer terrific insights into the financial health of a company -- and the prospects for a rise in its share price.
1. Ploughback and reserves
After deduction of all expenses, including taxes, the net profits of a company are split into two parts -- dividends and ploughback.
Dividend is that portion of a company's profits which is distributed to its shareholders, whereas ploughback is the portion that the company retains and gets added to its reserves.
The figures for ploughback and reserves of any company can be obtained by a cursory glance at its balance sheet and profit and loss account.
Ploughback is important because it not only increases the reserves of a company but also provides the company with funds required for its growth and expansion. All growth companies maintain a high level of ploughback. So if you are looking for a growth company to invest in, you should examine its ploughback figures.
Companies that have no intention of expanding are unlikely to plough back a large portion of their profits.
Reserves constitute the accumulated retained profits of a company. It is important to compare the size of a company's reserves with the size of its equity capital. This will indicate whether the company is in a position to issue bonus shares.
As a rule-of-thumb, a company whose reserves are double that of its equity capital should be in a position to make a liberal bonus issue.
Retained profits also belong to the shareholders. This is why reserves are often referred to as shareholders' funds. Therefore, any addition to the reserves of a company will normally lead to a corresponding an increase in the price of your shares.
The higher the reserves, the greater will be the value of your shareholding. Retained profits (ploughback) may not come to you in the form of cash, but they benefit you by pushing up the price of your shares.
2. Book value per share
You will come across this term very often in investment discussions. Book value per share indicates what each share of a company is worth according to the company's books of accounts.
The company's books of account maintain a record of what the company owns (assets), and what it owes to its creditors (liabilities). If you subtract the total liabilities of a company from its total assets, then what is left belongs to the shareholders, called the shareholders' funds.
If you divide shareholders' funds by the total number of equity shares issued by the company, the figure that you get will be the book value per share.
Book Value per share = Shareholders' funds / Total number of equity shares issued
The figure for shareholders' funds can also be obtained by adding the equity capital and reserves of the company.
Book value is a historical record based on the original prices at which assets of the company were originally purchased. It doesn't reflect the current market value of the company's assets.
Therefore, book value per share has limited usage as a tool for evaluating the market value or price of a company's shares. It can, at best, give you a rough idea of what a company's shares should at least be worth.
The market prices of shares are generally much higher than what their book values indicate. Therefore, if you come across a share whose market price is around its book value, the chances are that it is under-priced. This is one way in which the book value per share ratio can prove useful to you while assessing whether a particular share is over- or under-priced.
3. Earnings per share (EPS)
EPS is a well-known and widely used investment ratio. It is calculated as:
Earnings Per Share (EPS) = Profit After Tax / Total number of equity shares issued
This ratio gives the earnings of a company on a per share basis. In order to get a clear idea of what this ratio signifies, let us assume that you possess 100 shares with a face value of Rs 10 each in XYZ Ltd. Suppose the earnings per share of XYZ Ltd. is Rs 6 per share and the dividend declared by it is 20 per cent, or Rs 2 per share. This means that each share of XYZ Ltd. earns Rs 6 every year, even though you receive only Rs 2 out of it as dividend.
The remaining amount, Rs 4 per share, constitutes the ploughback or retained earnings. If you had bought these shares at par, it would mean a 60 per cent return on your investment, out of which you would receive 20 per cent as dividend and 40 per cent would be the ploughback. This ploughback of 40 per cent would benefit you by pushing up the market price of your shares. Ideally speaking, your shares should appreciate by 40 per cent from Rs 10 to Rs 14 per share.
This illustration serves to drive home a basic investment lesson. You should evaluate your investment returns not on the basis of the dividend you receive, but on the basis of the earnings per share. Earnings per share is the true indicator of the returns on your share investments.
Suppose you had bought shares in XYZ Ltd at double their face value, i.e. at Rs 20 per share. Then an EPS of Rs 6 per share would mean a 30 per cent return on your investment, of which 10 per cent (Rs 2 per share) is dividend, and 20 per cent (Rs 4 per share) the ploughback.
Under ideal conditions, ploughback should push up the price of your shares by 20 per cent, i.e. from Rs 20 to 24 per share. Therefore, irrespective of what price you buy a particular company's shares at its EPS will provide you with an invaluable tool for calculating the returns on your investment.
4. Price earnings ratio (P/E)
The price earnings ratio (P/E) expresses the relationship between the market price of a company's share and its earnings per share:
Price/Earnings Ratio (P/E) = Price of the share / Earnings per share
This ratio indicates the extent to which earnings of a share are covered by its price. If P/E is 5, it means that the price of a share is 5 times its earnings. In other words, the company's EPS remaining constant, it will take you approximately five years through dividends plus capital appreciation to recover the cost of buying the share. The lower the P/E, lesser the time it will take for you to recover your investment.
P/E ratio is a reflection of the market's opinion of the earnings capacity and future business prospects of a company. Companies which enjoy the confidence of investors and have a higher market standing usually command high P/E ratios.
For example, blue chip companies often have P/E ratios that are as high as 20 to 60. However, most other companies in India have P/E ratios ranging between 5 and 20.
On the face of it, it would seem that companies with low P/E ratios would offer the most attractive investment opportunities. This is not always true. Companies with high current earnings but dim future prospects often have low P/E ratios.
Obviously such companies are not good investments, notwithstanding their P/E ratios. As an investor your primary concern is with the future prospects of a company and not so much with its present performance. This is the main reason why companies with low current earnings but bright future prospects usually command high P/E ratios.
To a great extent, the present price of a share, discounts, i.e. anticipates, its future earnings.
All this may seem very perplexing to you because it leaves the basic question unanswered: How does one use the P/E ratio for making sound investment decisions?
The answer lies in utilising the P/E ratio in conjunction with your assessment of the future earnings and growth prospects of a company. You have to judge the extent to which its P/E ratio reflects the company's future prospects.
If it is low compared to the future prospects of a company, then the company's shares are good for investment. Therefore, even if you come across a company with a high P/E ratio of 25 or 30 don't summarily reject it because even this level of P/E ratio may actually be low if the company is poised for meteoric future growth. On the other hand, a low P/E ratio of 4 or 5 may actually be high if your assessment of the company's future indicates sharply declining sales and large losses.
5. Dividend and yield
There are many investors who buy shares with the objective of earning a regular income from their investment. Their primary concern is with the amount that a company gives as dividends -- capital appreciation being only a secondary consideration. For such investors, dividends obviously play a crucial role in their investment calculations.
It is illogical to draw a distinction between capital appreciation and dividends. Money is money -- it doesn't really matter whether it comes from capital appreciation or from dividends.
A wise investor is primarily concerned with the total returns on his investment -- he doesn't really care whether these returns come from capital appreciation or dividends, or through varying combinations of both. In fact, investors in high tax brackets prefer to get most of their returns through long-term capital appreciation because of tax considerations.
Companies that give high dividends not only have a poor growth record but often also poor future growth prospects. If a company distributes the bulk of its earnings in the form of dividends, there will not be enough ploughback for financing future growth.
On the other hand, high growth companies generally have a poor dividend record. This is because such companies use only a relatively small proportion of their earnings to pay dividends. In the long run, however, high growth companies not only offer steep capital appreciation but also end up paying higher dividends.
On the whole, therefore, you are likely to get much higher total returns on your investment if you invest for capital appreciation rather than for dividends. In short, it all boils down to whether you are prepared to sacrifice a part of your immediate dividend income in the expectation of greater capital appreciation and higher dividends in the years to come and the whole issue is basically a trade-off between capital appreciation and income.
Investors are not really interested in dividends but in the relationship that dividends bear to the market price of the company's shares. This relationship is best expressed by the ratio called yield or dividend yield:
Yield = (Dividend per share / market price per share) x 100
Yield indicates the percentage of return that you can expect by way of dividends on your investment made at the prevailing market price. The concept of yield is best clarified by the following illustration.
Let us suppose you have invested Rs 2,000 in buying 100 shares of XYZ Ltd at Rs 20 per share with a face value of Rs 10 each.
If XYZ announces a dividend of 20 per cent (Rs 2 per share), then you stand to get a total dividend of Rs 200. Since you bought these shares at Rs 20 per share, the yield on your investment is 10 per cent (Yield = 2/20 x 100). Thus, while the dividend was 20 per cent; but your yield is actually 10 per cent.
The concept of yield is of far greater practical utility than dividends. It gives you an idea of what you are earning through dividends on the current market price of your shares.
Average yield figures in India usually vary around 2 per cent of the market value of the shares. If you have a share portfolio consisting of shares belonging to a large number of both high-growth and high-dividend companies, then on an average your dividend in-come is likely to be around 2 per cent of the total market value of your portfolio.
6. Return on Capital Employed (ROCE), and
7. Return on Net Worth (RONW)
While analysing a company, the most important thing you would like to know is whether the company is efficiently using the capital (shareholders' funds plus borrowed funds) entrusted to it.
While valuing the efficiency and worth of companies, we need to know the return that a company is able to earn on its capital, namely its equity plus debt. A company that earns a higher return on the capital it employs is more valuable than one which earns a lower return on its capital. The tools for measuring these returns are:
1. Return on Capital Employed (ROCE), and
2. Return on Net Worth (RONW).
Return on Capital Employed and Return on Net Worth (shareholders funds) are valuable financial ratios for evaluating a company's efficiency and the quality of its management. The figures for these ratios are commonly available in business magazines, annual reports and economic newspapers and financial Web sites.
Return on capital employed
Return on capital employed (ROCE) is best defined as operating profit divided by capital employed (net worth plus debt).
The figure for operating profit is arrived at after adding back taxes paid, depreciation, extraordinary one-time expenses, and deducting extraordinary one-time income and other income (income not earned through mainline operations), to the net profit figure.
The operating profit of a company is a better indicator of the profits earned by it than is the net profit.
ROCE thus reflects the overall earnings performance and operational efficiency of a company's business. It is an important basic ratio that permits an investor to make inter-company comparisons.
Return on net worth
Return on net worth (RONW) is defined as net profit divided by net worth. It is a basic ratio that tells a shareholder what he is getting out of his investment in the company.
ROCE is a better measure to get an idea of the overall profitability of the company's operations, while RONW is a better measure for judging the returns that a shareholder gets on his investment.
The use of both these ratios will give you a broad picture of a company's efficiency, financial viability and its ability to earn returns on shareholders' funds and capital employed.
8. PEG ratio
PEG is an important and widely used ratio for forming an estimate of the intrinsic value of a share. It tells you whether the share that you are interested in buying or selling is under-priced, fully priced or over-priced.
For this you need to link the P/E ratio discussed earlier to the future growth rate of the company. This is based on the assumption that the higher the expected growth rate of the company, the higher will be the P/E ratio that the company's share commands in the market.
The reverse is equally true. The P/E ratio cannot be viewed in isolation. It has to be viewed in the context of the company's future growth rate. The PEG is calculated by dividing the P/E by the forecasted growth rate in the EPS (earnings per share) of the company.
As a broad rule of the thumb, a PEG value below 0.5 indicates a very attractive buying opportunity, whereas a selling opportunity emerges when the PEG crosses 1.5, or even 2 for that matter.
The catch here is to accurately calculate the future growth rate of earnings (EPS) of the company. Wide and intensive reading of investment and business news and analysis, combined with experience will certainly help you to make more accurate forecasts of company earnings.