INTELLECTUAL TRADING

PE Ratio PE ratio is calculated as close price of the stock divided by the earnings per share excluding extraordinary items for the most recent financial year. The ratio indicates the number of units of stock price it takes to purchase a single unit of the company’s earnings per share (EPS). If the company is currently trading at Rs.300/share and EPS of the company is Rs.30, then the PE ratio is 300/30 = 10x. So it costs Rs.10 to be eligible to purchase Re.1 of the company’s earnings PE ratio is the most important valuation ratio and helps understand whether a company is undervalued or overvalued. The best way to use a PE ratio is by comparing the ratio of different companies operating in the same sector Suppose company A is trading  at a PE ratio of 12 and B is trading at a PE of 17. Obviously A is undervalued when compared to B as it costs only Rs.12 to purchase 1 units of A’s EPS, whereas B’s costs Rs.17. However it is important to understand the reason behind the underva

1Y Forward Revenue Growth Revenue is the amount of money that a company receives in lieu of goods sold or services rendered The data item is calculated as the percentage change between estimated revenue for the current financial year and actual revenue for the most recently reported financial year The data items gives an idea about the expected growth in revenue during the current financial year. It is important to note that estimate of revenue for the current financial year will change, during the year, depending on analysts estimate of the same High revenue growth indicates that the goods or service offered by the company is found acceptable by the market and that the company is able to successfully expand its business. Over the medium term only high revenue growth will lead to greater profitability and hence a company should always seek to expand its business. Higher the expected revenue growth, the better 1Y Historical Revenue Growth The data item is calculated as t

Long Term Debt to Equity Long term (LT) Debt to Equity ratio is calculated as the ratio of LT debt of the company to the shareholders equity of the company for the most recent financial year. Long term debt refers to the loan amount raised by the company, which is repayable at least only after 1 year. Shareholders equity is the sum of profits retained by the company and amount invested into the company by shareholders This ratio helps understand the extent to which the company is raising loans to fund projects. Suppose the LT debt of the company is Rs.130 and shareholders equity is Rs.100. Then LT debt equity ratio is 130/100 = 1.3 Interest expense is a fixed cost that has to be paid on loan / debt raised by the company. Higher the debt raised more the interest cost. So if the company funds projects using more of debt funds, interest expense automatically increases eating into profitability of the company. Hence, all other things remaining the same, company with lower long te

Evaluating stocks Profitability Return on Equity Return on equity (ROE) is defined as net profit divided by the average common equity for the most recent financial year. The ratio helps understand number of units of profit generated per unit of money invested in the company. Higher the ROE better the utilisation of shareholders money Common equity refers to the money invested in the company by common shareholders. It is important to ensure that money invested during the financial year does not distort the ROE number. Hence average common equity, i.e average of common equity at the beginning and end of the financial year is considered for calculation The current year ROE number needs to be compared with the historical ROE numbers of the company to understand whether it is efficiently utilising capital.  If the ROE numbers are trending up, it is a positive sign ROE numbers of different companies operating in the same sector can also be compared with each other 5