Beta- Analyzing mutual funds

Guru Prasad -
 The risk of any investment made always depends on the volatility in the following investment. If we can have a factor that could tell us about the volatility of a investment and help us judge our risk and corelate it with our capability to take risk, how would that be? Well Beta factor is one such factor that could help us know the sensitivity of our stock or portfolio fund that we have chosen to invest. Beta ratio:- Understanding Beta:-  Beta is a metric used in fundamental analysis to determine the volatility of a stock with comparison to the overall market that has a fixed beta ratio of 1 always. Stocks or funds that are ranked with a beta ratio above 1 generally tend to fluctuate more and hence give access to more risk but yielding higher returns too at the same time if gone in favour. While the risk is slightly less in the funds with beta ratio below 1 they give less but yet stable return on investments generally. Hence, the beta factor can be said as a risk- reward factor, helpi
Post a Comment

P/E Ratio in stock analysis

Guru Prasad -

 P/E ratio or the Price to earnings ratio is the criteria which is used to compare with various other factors or is itself observed to understand weather a stock is undervalued or overvalued based on its share price. It can be calculated by simply dividing the price of the stock by the earnings per share of a stock.

                                P/E=  Share price / Earnings per share 


The P/E ratio helps investors determine the market value of a stock as compared to the company's earnings. In short, the P/E shows what the market is willing to pay today for a stock based on its past or future earnings. A high P/E could mean that a stock's price is high relative to earnings and possibly overvalued. Conversely, a low P/E might indicate that the current stock price is low relative to earnings or undervalued.

However P/E ratio always individually can't be used to determine the value of a stock since sometimes a high P/E ratio could also show the sentiment and expectations of a investor from the stock and a companies growth capabilities. This criteria also can't be used to measure the value of a small cap companies. Hence a high P/E ratio doesn't necessarily mean a over valued share. However, when we look at the Indian stock markets the nifty trading at a high P/E ratio of about 26 or above could also mean that soon the market is looking for a profit booking or a small correction anytime soon.

As stated earlier, to determine whether a stock is overvalued or undervalued, it should be compared to other stock in its sector or industry group. Sectors are made up of industry groups, and industry groups are made up of stocks with similar businesses such the IT sector, banking and finance sector or the construction sector, etc. 

If a stock is trading below it's industry P/E than the stock is expected to grow well in it's near future to match the industry P/E if it's other growth fundamentals show strong support.

P/E ratio could also be used for calculating the PEG ratio. Now, what is this PEG ratio? A P/E ratio, even one calculated using a forward earnings estimate, does not always show whether or not the P/E is appropriate for the company's forecasted growth rate. To address this limitation, investors turn to another ratio called the PEG ratio.

Now let's look at how does this determine the value of a stock.

                                 PEG ratio= PE ratio / Estimated growth rate

Now let us firstly divide the stocks into good or well performing stocks, neutrally  performing and bad performing stocks and look at it's comparisons with the PEG ratio.







Comments

Post a Comment

If you have any doubts, different opinions or any suggestions on how to improve the quality of my blogs please feel free to share.

Best Blogs

Financial literacy in India

Guru Prasad -
Image
"If you buy things you do not need, soon you will have to sell things you need." Hey guys. I hope you all must have heard this well known quote by Warren Buffet.  College graduates often spend 16 years gaining skills that help them command higher salary; yet little or no time is spent helping them save invest and grow their money. In a growing and developing nation like India where economy always remains the cause of concern, Do you all know that the financial literacy in India is just 24%, which is the least among it's well competing peers. You don't believe me! Well let me take you through a complete detailed study of the financial literacy in India. What financial literacy means? Financial Literacy is the ability to understand basic financial concepts and the possession of knowledge and skills required to make informed and effective financial planning, decisions using the available financial resources. It is about knowing how to generate, spend, invest and save mon
Read more

Devaluation and depreciation of currency. Are they same???

Guru Prasad -
When the value of currency decreases, people often get confused between devaluation and depreciation. But what is the difference? Is the value of currency really important to be a developed nation? Devaluation:-   Devaluation is the deliberate downward adjustment of the value of a country's money relative to another currency or currency standard. It is done deliberately to reduce the export costs and shrink trade. It also helps in paying debts by printing of more notes which also decreases the value of money. Unlike depreciation, it is not the result of nongovernmental activities. This is often done to render themselves more efficient in the global market and gain better foreign investments by offering a low labour cost to the foreign companies. A export oriented country would always prefer to stay more committed towards a lower currency value as cheaper costs would attract more investors. Depreciation:-  Currency depreciation is a fall in the value of a currency in a floating exch
Read more

SPAC and equity based crowd funding

Guru Prasad -
 SPAC( Special purpose acquisition companies) and equity based crowd funding are generally two concepts of the U.S stocks which haven't really been ruled out in India but are being analysed by SEBI if they are vulnerable for the Indian markets too. But the question in what are they? SPAC (Special purpose acquisition companies):-  These are companies  with no commercial operations that is formed strictly to raise capital through an initial public offering  (IPO ) for the purpose of acquiring an existing company. Also known as "blank check companies. " These companies are strictly asked to asked to complete their acquisition within a time frame of just 2 years or else written all the collected funds back to the public.  In 2020, as of the beginning of August, more than 50 SPACs have been formed in the U.S. which have raised some $21.5 billion. The  Investors in these SPACs can range from well-known private equity funds to the general public. Usually when these companies bri
Read more

3 things to first see while choosing a stock for fundamental analysis

Guru Prasad -
Image
 When choosing a stock to invest there are obviously many things to look for, but what are those essential things that you should see while shortlisting at the first sight? It is obviously impossible to fundamentally analyse every stock at the first glance and waste time. So let us have a look at how to make it simple:- 1. The market capitalization of the company:- How big company are you looking for to invest? A large cap, medium cap or small cap. Generally a large cap which means a market capitalization over 50,000-60,000 crores is safer to invest comparatively. Smaller companies obviously do give better returns but the risk is also usually that high. Therefore a large cap or a mid cap would do better while choosing the stock. The market cap shows how much the company has expanded over years and how large the company is while investing. Hence this could be set as our first and for most factor. 2. The five year graph of the company:-  Have a look at these images. Looking at the above
Read more

Contact Form

Name

Email *

Message *

Popular posts from this blog

Devaluation and depreciation of currency. Are they same???

Guru Prasad -
When the value of currency decreases, people often get confused between devaluation and depreciation. But what is the difference? Is the value of currency really important to be a developed nation? Devaluation:-   Devaluation is the deliberate downward adjustment of the value of a country's money relative to another currency or currency standard. It is done deliberately to reduce the export costs and shrink trade. It also helps in paying debts by printing of more notes which also decreases the value of money. Unlike depreciation, it is not the result of nongovernmental activities. This is often done to render themselves more efficient in the global market and gain better foreign investments by offering a low labour cost to the foreign companies. A export oriented country would always prefer to stay more committed towards a lower currency value as cheaper costs would attract more investors. Depreciation:-  Currency depreciation is a fall in the value of a currency in a floating exch
Read more

Are markets over rallying?

Guru Prasad -
 The sensex has touched 59k and nifty has had a strong rally giving a touch to the 17,700 mark. While the nation is leading towards a fast economic recovery there are also certain concerns over a third wave of covid that lies, but yet the bull run has seemed to have no impact. While the reformations in the telcom sector to help revive vodafone idea has been a positive news for the telcom sector there are also reformary steps being taken by the government along side. The GST collections are touching new highs being a good symbol for an economy recovery. Hence, the foreign portfolio investments also seem to be flowing well into the country. While running corrections could take place in market now there does not seem any reason for a drastic fall in the market until effected by another wave of covid. But, yes the markets are growing at a pace more than expected and hence it could be the right time for partial profit bookings in some stocks. While the market still trades at a pe ratio whic
Read more

Rising crude oil and its hurdle to Indian economy

Guru Prasad -
Image
Petrol and Diesel prices both have breached the Rs. 100 mark and crude oils continue to rise with the opening of the economy, geopolitical fears, overpotential demand supply disruption or any policy stands taken by OPEC countries( Organization of the Petroleum Exporting Countries) , all around the world. Officials at oil marketing companies have however noted that even current record-high prices are lower than what refiners should be charging in line with international prices and that prices are set to rise further unless there is a cut on levies on autofuels or a fall in crude oil prices.   But, How could this effect the Indian economy indirectly or directly? Well let's discuss. India being the third largest importer of crude oil spends a huge amount on crude oils buying almost 1.5 billion barrels of crude oil every year at approx which accounts to almost 85% or more of its total crude oil requirements.  Well I hope you might be aware that the exchange currency for buying the crud
Read more