Using Earning Per Share (EPS) to Analyse Stock

When it comes to stock fundamental, the first thing in mind is to look at the macro-perspective of the economy (macro-economy) before you even start looking into each individual stock. 2 things are important to understand this macro-economy are by looking at these 2 important key indicators as I mentioned in my previous post:

• What does GDP Growth Mean for You?
• Understand the Market Trend Before You Trade

The next thing what you want to do is to study each individual stock that you plan to invest using “Financial Ratios”. There are many financial ratios out there, the most basic one is called “Earning Per Share” or EPS.


What is Earning Per Share (EPS)?

 The formula is:

EPS = Net Income / Average Outstanding Shares 

Note: Net income is sometimes called “Net Profit” as well. Average outstanding share is sometimes called ”Weighted average number of ordinary shares in issue”.

The EPS can be get from the “Income Statement” of a company which is usually reported in the company’s annual report.  You can go to the company website and look for the “Investor Relations”. It usually puts under the “About Corporate”. The EPS is usually stated in the “Income Statement” and you do not need to calculate at your own. If it is not stated, then you can have to calculate the EPS using the formula above which is unlikely the case I think. :) 


What does EPS mean to investor?

It basically tells you how much you earn or your ROI per 1 share that you invest. So, the higher the EPS the better. This is also called “Dividends” but investor usually do not get all the value as stated in the EPS. It is up to the company to declare how much dividends they want to give and use the remaining profits for their business.

When doing fundamental analysis using financial ratio, one of the key things to compare the companies with the same industry. You usually do not compare 2 independent stocks that from different industry. The following is an example that I get for MAS and AirAsia Airlines in Malaysia for annual analysis comparison.

Table 1: EPS (MAS vs AirAsia)

Malaysia Airlines	2007	2008	2009	2010
MAS (EPS)	58 sen	14.6 sen	25.3 sen	7.2 sen
AirAsia (EPS)	21.2 sen	(21.1) sen	20.6 sen	38.4 sen

So, which one is better? If you take the average, it is probably about the same for MAS and Airasia stocks but you can see the trend for MAS is moving down. Thus there is another better indicator is called" “EPS Growth Rate”. This is not stated in the income statement of the annual report. You have to calculate your own.  For example, this is the EPS growth rate for MAS and Airasia for the past 3 years based on the table 1 above:

Table 2: EPS Growth Rate (MAS vs AirAsia)

Malaysia Airlines	2008	2009	2010
MAS	-74.8%	+73.3%	-71.5%
AirAsia	-200%	+198%	+86%

So, which one is better? Probably Airasia? You can also see that it recovered with +~200% EPS growth rate in 2009. Same to MAS but it dropped again with minus ~70% in 2010. Thus, AirAsia is better? :D Not true? You can try to confirm the data in 2011. :) Past 3 years may not sufficient, when you look beyond past 3 years, MAS was in fact having low or negative EPS. Anyway, if you are really a serious investor, you should also look closely at the quarterly report. It may gives you any signs of weakening profit.


Summary

EPS may not tell the consistency performance but the EPS growth rate will. If a company always has positive EPS growth rate in the past few years, it means the company is fundamental strong - a least is not losing money and growing.  Also, don’t forget that when you perform the analysis, you should always compare companies within a same industry. Then, you will have some ideas who is performing better.

P/S: Are you the one lazy to read annual or quarterly financial report because the content is so damn long? This is because you do not know what information that is really useful to you. So now, you at least know “Earning Per Share” – just do a search in the annual report and you do not need to read all the content. Also, if you really interested in a particular company, just use a simple excel spreadsheet to keep track of their current and past performance. :)

How Paradigm or Work Process is Formed?

When you are taking new role or joining a new company, you usually are very motivated because you have a lot of things to learn. So you ask around here and there.Unfortunately, you always do not get the answers that you want. Then, slowly you get demotivated....

Let's check it out the following series of picture which I got it from a friend many years ago that shows an experiment being carried out by scientist. I find that is very true especially in the working culture. So, let's check it out!

Now, does the answer sound familiar to you? It happens to me lately and in fact if I think of it, I got a lot of this kind of answers in the past too. So I'm having tough time to figure that out by myself. It is a very time consuming activity in fact.

Guess what, the worst thing is sometimes I give this kind of answer too! :) Well, sometimes there is a trade off that you have to make especially when you have too many plates on your hands. You can't understand everything in and out, and prioritizing is the key here. Therefore, sometimes I have this kind of answer too although I always try my best to avoid.

Having said so, for the things that completely owned by you, you shouldn't give this kind of answer. In other words, you just being not accountable. Don't you think so?Or you just take the answer as it is?

P/S: In personal finance or investment, you sometimes will get this kind of answers too. Well, that depends on how deep you want to go too. :) 

Malaysia 2012 Budget - Nothing Much for Personal Finance

It seems to me nothing much from a personal finance perspective. Anyway, let's go through it which I think maybe useful to you personally...


(1) Exemption of Import Duty For Hybrid & Electric Cars

This is from the previous year and will be continue until 2013. I'm not sure if this is a good thing because the net spending in not decreasing if you buy hybrid & electric cars. So, think twice if you really want to go for Hybrid & Electric cars.


(2) Free Primary & Secondary Education Fees

I do not aware that we need to pay for primary & secondary education fees. All the while, I thought that is free! :) Perhaps I'm wrong now.  How much exactly is being save here? Anyone knows?


(3) RM500 for Households Monthly Income Less Than RM3K

It is one time payment. So monthly, you will have RM  41.67. Alright, this is still better than nothing especially if you have low income household. Besides that, there will be one-off RM100 schooling assistance for primary and secondary schools(up to form 5) and also one-off RM200 book voucher for private & public tertiary institution and form 6 as well.


(4) Additional Bonus for Civil Servants and Pensioners.

There will be 1/2 month bonus for all civil servants and RM500 bonus for all pensioners. Bonus to be paid by December 2012. This sounds good for civil servants.


(5) Increase to 10% for  Real Property Gains Tax.

Real Property Gains Tax (RPGT) will be increased to 10% from 5% if the property is sold within 2 years. The 5% remains as previously - if the property is sold between 2 to 5 years, there will be 5% RPGT and nil for 5 years and above. This may not be good for speculator but if you really want to sell, just wait for 2 years. Property investment is meant for long term anyway, in my opinion.

Sharing: Do you know the RPGT used to be 30% before 2010? Then later it was then revised to 5%. It seems to me the forming of property bubble is somehow indirectly caused by the government.  Don't you think so? Now, they're fixing it?


(6) Some other stuff...

• Retirement ages increases to 60 from 58 for civil servants. 
• Free Papilloma Virus immunization for cervical cancer prevention.
• EPF increases to 13% for Employer Contribution but that is only for those earning below RM5K.

Summary

Well, what? As usual, there is no beneficial to me at all. It is worst than last year! That's why I think this round for Malaysia 2012 budget is really nothing much at least to myself. Is that the reason why many of us are migrating to other countries? 

If you are civil servants and have low income household, this budget will be beneficial to you. Hope you can enjoy this benefits. If you wonder what are the previous years Malaysia budget, you can visit the following links:

• Malaysia 2011 Budget - Personal Finance Highlights
• Malaysia 2010 Budget - What should I do with it?

P/S: If I missed out any key items, feel free to share....

What Does GDP Growth Mean to You?

GDP stands for Gross Domestic Product. It represents the total value in the respective country currency of all goods and services produced over a specific time period. GDP is calculated will not be discuss here because that is kind of complicated. We will let those economist to do their job. What really important about GDP is, it help investor to tell how well a country is doing or how healthy is the economy.

GDP is usually expressed as a comparison to the previous GDP value in percentage. That is called “GDP Growth Rate”. It is either based on yearly or quarterly. For example 3% GDP growth rates in 2010 means the economy grows by 3% as compared to 2009. On the other hand, –3% GDP growth rates means the economy declines by 3%


What is recession?

When GDP growth rate is negative for 2 or more consecutive quarters, economist calls that as “Recession”. Let’s look at Malaysia GDP growth rate below, we’re having recession in the early of 2009.

Source: www.tradingeconomics.com 

(You can also get the GDP data for your country here) 

Now, let’s look at the KLCI index below. Do you see the similar trend with the GDP growth rate?

It basically tells you that when recession happens, stock market crashes. Usually significant change in GDP growth rate will affect on the stock market. Investor look at the GDP data very closely to understand the current economy situation and then react to their investment’


Discussion

Given all these high-level explanation of GDP, what is your take away? For me,  I use the GDP growth rate as a recession detector. When recession happens (i.e. 2 consecutive negative GDP growth rate), I will quickly withdraw my investments and then watch out the GDP growth rate very closely when the economy will recovered. When it happens or when I think when it will happen (i.e. economy start to recover), I will start investing again. :)

P/S: For most updated Malaysia GDP report, you can refer to www.statistics.gov.my.

4 Stages of Stock Market Cycle - So What?

I just read around and I found this 4 stages of stock market cycle by Stan Weinstein. It basically means no matter how the stock will look like, it can never go out of these 4 stages. These 4 stages are very powerful because it can apply to all time frames whether it is 1 day, 1 month, 1 quarter, 1 year or 5 years. Powerful or not? Also, it will be repeated over and over again. For example it goes back to stage 1 from stage 4. Now let’s look at what are these 4 stages about:

Stage 1: Consolidation & Accumulation

This is also called base building stage or a depression stage. Basically, It is the most bottom point of the stock market cycle where majority of investors have lost confidence at this stage and are reluctant to invest their money in stock market. Smart investors at his point are waiting to use their reserved cash to start investing when it starts moving to Stage 2.


Stage 2: Uptrend &  Mark-up

This is also called the expansion stage or mark-up stage. At this stage, the stock has been stable for a while and starts to climb up. Novice or inexperienced investors are still hesitant to get in because they are still haven’t recovered from the stage 1. Smart investor will start investing at the early of stage 2 as shown in the graph.


Stage 3: Distribution & Peak

This is the stage where you can hear all the good news and the economy seems like it has never been better. At this stage, most novice or inexperienced investors jump into stock market because they think the prices will go even higher. This is exactly what happened to me when I owned an US stock with USD100 price in year 2000. I was still expecting it will go even higher! Smart investor at this stage are getting ready to exit.


Stage 4: Downtrend & Mark-down

This is a declining stage but nobody believes the downtrend especially at the early stage. They believe the downtrend is just a correction and it will go up pretty soon. On the other hand, smart investors have mostly taken profits and sold all their shares causing the share prices to drop. Novice investors will either take losses or turn to long-term hold if they reluctant to sell.

Note: These 4 stages of stock cycles are always correct because it is based law of nature. What is the law of nature? The law of nature is: what goes up must come down, what goes down must come up. So no matter what, the 4 stages are always correct!


SO WHAT?

So what? You may ask because no one will know exactly which stage they are in and this makes the whole thing pointless. Basically you still do not know when is your best time for buying and selling. The purpose of this article is to let you know there are these 4" stages. What you need to do next is how to identify or at least to make your best guess to identify where you are in this 4 stages based on whatever data that you have.

P/S: A technique called “Technical Analysis" is one of the ways you can predict the future based on the past historical data. However, I have not used or researched on technical analysis yet. So for those who have used technical analysis before for your stock investment, what do you think of this technique? Can technical analysis predict the future or at least help you to make a right investment decision?

Single People Need Budgets Too

Many financial experts highly recommend a household budget in order to keep family spending and savings goals on track. It makes sense that proper money management for a household is a necessity to ensure financial security for all family members. For those who do not yet have families, it is equally important to establish a budget to prepare for the future as well as survive day to day, especially when single individuals are just starting out on their own, financially independent from their parents.

Why Singles Need Budgets

Overspending income is the reason why so many people are facing debt problems. With a budget you can properly account for where all of your money goes on a weekly or monthly basis. Without a budget, it can be all too easy to spend cash as a single person because outside of basic financial obligations, there are likely no other responsibilities to tend to such as children who need things or spouse who should have a say in money matters.

As a single person without a budget, it is also easy to lose sight of the big picture. Spending what you earn as you earn it leaves little room for saving for the future or building a truly solid financial foundation.


How to Start a Single Person Budget

A budget is simple to get started. Sticking with the methods is what gets many people who end up ceasing their good financial habits. It makes sense to develop a simple budget that allows you to make simple entries that doesn’t waste time. A weekly review of a budget is all it really takes to ensure you are on target.

Developing a budget requires that you gather all of your financial obligations for a month including utility bills, credit card bills, mortgage or rental payments, and any other monthly expense paid out on a regular basis. You will also need to gather your income statements so you know how much you bring home each month.

These amounts along with the creditors who receive your monthly payment should then be listed on a personal budget worksheet. Once all of the information is entered, the total amount of expenses should be deducted from the total amount of income. If the difference is negative, it is a clear sign that you need to make cuts to your budget or find a way to earn more money. If there is an overage, the funds that are ‘left over’ each month should be allocated into a proper savings account for emergency situations, vacations, or retirement.

In addition to the compilation of expenses and income, single consumers should also take a solid month to track the money they are spending and where they are spending it. This is for all expenses outside of regular financial obligations, including coffee stops, dining out, and transportation-related expenses. By tracking every penny spent in a month’s time, you are able to develop a more accurate budgeting system and as a result, establish a much more solid and reliable financial foundation for the future.

This is a guest post by Tisha Tolar.

Understand Market Trend Before You Trade - NASDAQ and KLCI

If you have no idea what is stock at all, I suggest you read the following first: Stock Market 101: Understand How Stocks Get Started.

To be successful in stock investing, the first thing that you want to do is to analyze the entire stock market as whole and learn how the majority investors behave in the stock market. The stock market index is the indicator to tell you how the market moves. It represent everyone present in the market place. :D

I personally invest in US stock and Malaysia stock market. So 2 stock market indices that I"m interested are Nasdaq Composite Index and KLCI.. The following charts show the 1 year histrory trend.
 

KLCI - FTSE Bursa Malaysia Large 30 Index

KLCI comprises of 30 largest companies in Malaysia with approximately 70% of the total market capitalization of the FTSE Bursa Malaysia 100 Index.

Nasdaq Composite Index


Nasdaq Composite Index comprise of over 4000 innovative and fast growing technology companies in United States of America.

Note: What I like about this chart is when you click on it, it shows you the technical analysis of the chart. You can then perform the "Technical Analysis" on those chart. Basically technical analysis helps you to make investment decisions based on the study of charts rather than the stock fundamental. Interesting isn't it? But this is still something new to me but I will share with you more later on once I"m familiar with it. :)

What I don't like about this chart is only able to display up to 1 year trend. To view more than 1 year trend, you will have to use Yahoo Finance.  But Yahoo doesn't have a way to embed the stock chart in a website or blog.If you know, feel free to share with me.

P/S: What about you? There are lot of stock market indices out there. Which market index do you refer?