Sunday, October 4, 2009



Profit Margin

Profit Margin =
Net Profit / Revenue

It is advised that investors should always find the company which has higher profit margin among its peers.

A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. A decreasing trend of profit margin is not a good sign and vice versa.

Dividend Yield

Dividend yield, or DY shows how much a company pays out in dividends each year relative to its share price. A company which can always deliver a higher DY than a fixed deposit interest rate is always a preferable choice.

Dividend yield =
Aggregate annual dividend per share / Share price

Calculating the dividend yield of a company is not easy, because some companies may distribute their cash via various methods.


A rapid growing company is usually has a lower dividend payout. For example, glove-manufacturing companies in Malaysia will prefer to reinvest their annual net profit to increase their factory size or install new production lines instead of paying back their shareholders.

Understanding the dividend policy of a company is also important. For example, BAT, Carlsberg and Dutch Lady have a track record of paying out more than 90% of their net profits as yearly dividend.

PE (Price Earning Ratio)

PE ratio is commonly used to value a company. It is commonly reflective of whether a company’s share price is expensive (overvalued) or undervalued.

PE =
Current share price / EPS

Generally, PE ratio can be categorized as ‘Historical PE’ and ‘Forecast PE’. Since the stock market is always running ahead of current economic conditions, most of the stocks’ price is commonly reflective of the ‘Forecast PE’ valuation.

Thus, to be able to accurately forecast the future EPS and the future PE ratio of a company has become a very important factor when investing.


Investors should compare the PE ratio of a company with its peers which fall in the same industry. It is always bias if we compare the PE ratio of the companies which falls under different industries.
A company that has the leadership status (in terms of market share, competitiveness, market capitalization, efficiency of economic scales etc) will normally deserve a higher PE ratio among its peers.
The article 'Glove war amid H1N1 outbreak' can be refered as an example.
Some companies may have a lower PE ratio all the while. Please beware of these misleading PE ratios because these companies may fall under the following categories.

(a) Facing stiff competition with decreasing profit margin (locally or aboard

(b)Involved in sunset industry

(c)High gearing (high debt)

(d)Do not have dividend payout records.


Understanding the role of EPS in stocks analysis is vital. Take a look the following formula that explains EPS.

EPS = Earning per share

Net profit / Total issued ordinary shares


PE =
Price / EPS

From the formulae, one can see that the increase in EPS will directly lead to
1. an increase in ROE,
2. a decrease in PE.

Besides that, it may also indirectly lead to
1. an increase in positive cash flow,
2. an increase in dividend payout (thus increasing the DY)
3. a decrease in gearing ratio.

All of the above factors will finally lead to the attention of the market, hence leading to a higher rating of the stocks.
As a conclusion, the more consistent of the EPS growth of a company, the brighter the prospect of the company.


  1. The quality of EPS should be derived from its solid operating profit. Exceptional earnings coming from land or asset or quoted share disposals should not be taken into consideration.
  2. Events that can vary the projected EPS (future EPS) are important to note because the events can significantly influence the share price of a company, for example, a construction company that announces that it has won a huge contract, etc.
  3. For some companies that have issued warrants, the diluted EPS should be referred to instead of its non-diluted EPS.

No comments:

Post a Comment