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.