GUYS, gone are the days when u could just get into a stock and 4get the underlying analysis of key fundamentals. Even fundamentals dont really count 2day due to sentiment.
But u gotta do the math bigtime b4 u enter stocks!
You have to look at Return on Equity, and then you have to look at Return on Assets. Return on equity shows the flaws if any in earnings per share, and return on assets shows the flaws in return on equity.
Return on Assets shows your return on the companys liabilites + the equity.
Because the fundamental rule of finance and accounting is that Assets = liabilities + Equity
In this environment debt ratios are important, or the equity ratio, which is total equity/total assets
****look also for long term debt and off-balance sheet debt!!!!!
Companys like IPL for example had monstrous levels of debt and long term debt
I dont like all the long term debt!
Many many blue chips have ALOT of long term debt as opposed to short term debt
Have a look at the balance sheet for these debt levels and work out the debt/equity or even better, the debt/debt+ equity.
Long term debt and off balance sheet debt
youll find most companies are loaded with debt long term in nature. Analysts only worry bout short term debt and mostly use that!
Return on Equity
Return on Assets
Return on capital
debt to equity or debt/debt + equity
long term debt assessment n off balance sheet
All the above items are far more important than P/Es and EPS
EPS may grow but return on assets or return on capital may be getting much worse!
Why??? coz acquisitions are adding to EPS, but these businesses acquired arent returning as good returns on equity
u can see this with many companys that just keep taking over
EPS gets better, but return on equity worse or return on assets worse if it was done with debt finance!
EPS n PE is for novices! Be careful!
Even Return on Equity can be decieving, so Return on Assets or return on capital is best
Duponts analysis of ROE see thru the faults as well - it says that net profit margin is important, as well as the amt of revenue generated by each asset and the level of equity as a % of total assets
companys can just do cap raisings and this gives them cash and increaes their equity, but what they do with that added cash is important
duponts ROE is : net profit/revenue (net profit margin) * revenue/total assets ( how much revenue is each asset producing) * total assets/equity = return on equity
i.e
net profit/revenue * revenue/total assets * total assets/equity
do the math
it equals ROE
Dont EVER just look at EPS
look at payout ratios for divvys as well as these affect ROE!!!!!
