Monitoring Methodologies That Can Be Adopted

If you have invested in the equity markets your investment needs to be continuously monitored. Even if you buy into equity with a long-term view, you still need to assess the performance of your portfolio on a regular basis. To assess the stock performance you need to monitor the performance of the company as well as the industry. You also need to keep in mind the economical, political and global factors affecting the firm. Therefore, take a closer look at the following factors while measuring the performance of stocks:

Assess companies’ quarterly performances

You must have noticed that every three months – at the end of June, September, December and March – the newspapers are full of advertisements about the financial results of companies. That’s because companies are required by law to publish their financial results every quarter. They must also send the results to the stock exchange where they are listed. Now you can track the performance through the year since the quarterly results show the most recent performance of companies. While glancing through quarterly results, keep a watch on the following numbers:

Sales growth

Revenues reveal how much the company has sold over a given period. Sales are the direct performance indicators for companies. The rate of growth of sales over the previous years indicates the forward momentum of the firm, which will have a positive impact on the stock’s valuation.

Net profit

The growth in net profit indicates the attractiveness of the stock. The expected growth rate might differ from industry to industry. For instance, the IT sector’s growth in bottom-line could be as high as 65-70 per cent from the previous years whereas for the old economy stocks the range could be anywhere between 10 per cent and 15 per cent.

ROI (return on investment)

ROI in layman terms is the return on capital invested in business. For instance, if you invest Rs 1 crore in men, machines, land and material to generate Rs 25 lakh of net profit, then the ROI is 25 per cent. Again, the expected ROI by market analysts could differ form industry to industry. For the software industry, it could be as high as 35-40 per cent, whereas for a capital-intensive industry it could be just 10-15 per cent.

PSR (price-to-sales ratio)

This measures a company’s stock price against the sales per share. Studies have shown that a PSR above 3 almost guarantees a loss while a PSR below 1 gives you a much better chance of success.

ROE (return on equity)

Supposedly Warren Buffet’s favorite ‘number’, the ROE measures how much your investment is actually earning. Around 20 per cent is considered a good level.

Debt-to-equity ratio

This measures how much debt a company has compared to the equity. The debt-to-equity ratio is arrived at by dividing the total debt of the company with the equity capital. A D/E ratio of 2 or greater is risky. It means that the company has a high interest burden, which will eventually affect its bottom-line. If the firm is using only a small portion of its revenues to pay off interest, then the company is better off by employing debt to enhance growth. However, note that companies in capital intensive industries have higher debt/equity ratios. Hence, this tool is not the right parameter to assess such firms.

Beta

The beta factor measures how volatile a stock is when compared with an index. The higher the beta, the more volatile the stock is (a negative beta means that the stock moves inversely to the market so when the index rises the stock goes down and vice versa).

EPS (earnings per share)

This ratio determines what the company is earning for every share. For many investors, earnings are the most important tool. EPS is calculated by dividing the earnings (net profit) by the total number of equity shares.

P/E ratio (price/earnings ratio)

Earnings per share alone mean absolutely nothing. In order to get a sense of how expensive or cheap a stock is, you have to look at earnings relative to the stock price and hence employ the P/E ratio. The P/E ratio takes the stock price and divides it by the last four quarters’ worth of earnings. If AB Ltd. is currently trading at Rs 20 a share with Rs 4 of earnings per share (EPS), it would have a P/E of 5. A significant increase in earnings can enhance share value. When a stock’s P/E ratio is high, a majority of the investors consider it as pricey or overvalued. Stocks with low P/Es are typically considered as having good value. However, studies done and past market experience have proved that the higher the P/E, the better the stock.

Just by glancing at the results for the fourth quarter, you can easily conclude whether the company has made a profit or loss. Is that profit high or low? Is it good enough? To answer those questions, you will have to compare the quarterly numbers with those of the same quarter in the previous year. To make comparisons easy, companies provide these numbers, too.

So, you can check out the growth in each item by comparing it with the numbers in the corresponding quarter of the previous year. While going through the results, the extraordinary items and the other income should be excluded as they are not recurring items. All of the above give a fair idea about the stock and its prospects, but you should always take care while comparing a stock with that of peers.

Study overall trends in capital markets and the economy

The return on equity is directly dependent on the situation prevailing in the economy. The government’s policies, budgetary issues, reforms promoting a particular sector and the global impact on the Indian market need to be considered before deciding on a stock. For instance, a government’s decision to allow foreign direct investment in real estate, and remove the multi-fibre agreement in textiles would give an edge to these industries over others. The outlook for the stock market also depends on the outlook for basic economic factors such as:

• The supply of funds coming principally from business and personal savings

• The demand for funds arising from financing expenditure by consumers, business and governments

• The growth rate for real GDP (the total market value of all the goods and services produced within the borders of a nation during a specified period)

• The inflation rate and anticipated inflationary pressures.

Why Equity Stocks?

Risks Involved In Equity Stocks

Valuation Of Shares and Business

Why Monitor And Review Your Equity Investments

Monitoring Methodologies That Can Be Adopted

When To Sell Your Equity Stocks

Stock Market And Taxation

Process Of Investing In Equity Stocks: Online And Offline

Stock Market Myths

Frequently Asked Questions (FAQs) About Stocks And Stock Market

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