EPS and PE

Basic concept
Price of a stock is determined by demand and supply of a stock. If demand for a
stock is more , price will increase.
The demand for a stock will be dependent on company's current earning and
earning in future.
Fundamental study includes Value or price of stock in relation to earnings or
profit . So, we have key denominators:-
EPS - Earning Per Share , profit after tax divided by number of shares
PE - Price earning Ratio
This is price of a share divided by EPS
There is no yardstick for PE and it may vary from 4 to even 50 plus.
Reputed management has more PE because demand is more from investors. Tata
, Multi national companies have higher PE.
Companies having higher growth in profit will have higher PE compared to
companies having lesser growth in profit.
Fundamental study starts with PE , price in relation to earnings or profit and
understanding undervalued or overvalued stocks.
I welcome your questions on basic concept of EPS and PE.
2)Undervalued and Overvalued stocks
PE is one of the indicator of value of stock for less informed investor.
Low PE does not mean share is investment worthy and high PE does not mean
investment should not be done in high PE shares.
Dividend & Bonus share , growth in sales and profits , reputation of the group
also contributes to high or low PE. Apart from the above , management and /or
operators interest in share also plays important role in high or low PE.
Undervalued or Low PE Shares
Cosmo Films 6.93
Srikalahasti. 7.09
Nandan Denim 9.90
Tinplate. 9.45
Karnataka Bank 4.51
Dewan hous. 8.43
Hindustan Zinc. 8.73
Balasore Alloys 7.76
GMDC. 4.90
TNPL. 7.04
The above 10 share are having PE less then 10 presently but were posted by my
when PE was even lower. This is just illustration of Low PE Shares which are
undervalued. The above company are Dividend paying etc.
Overvalued or high PE shares
Hindalco. 48.39
Ashok Leyland 35.93
Jain Irrigation. 33.86
Yes bank. 15.31
Titan Company 42.12
TTK prestige. 51.53
DLF. 58.05
Mindtree. 20.85
Tata power. 20.28
Larsen. 23.82
There are shares where no PE is mentioned . Investors who are not expert
should avoid such shares:-
PE Zero Shares & price
Kiri Industries. 190
Orchid Pharma. 41.85
Punj Llyod.(2). 23.45
Hind oil ex. 33.40
Unitech (2). 5.09
Reliance Def. 67.70
SAIL. 44.15
GMR infra.(1). 11.82
Jaiprakash (2). 8.04
Reliance comm (5) 53.00
So , we have Low PE , High PE and Zero PE shares. Low PE shares should be
further analysed to check whether investment should be done.
This post is only to explain PE to less informed investors .
We will mention in next post , additional points to be checked along with PE

3)PE with Dividend Yield

Dividend yield shows your return on investment by way of Dividend.
For a lay investor , Dividend yield may act as strong safety net when ever market
crashes.
Shares having higher Dividend yield , in general , has a better chance of
appreciation in price than shares with nil or very less Dividend yield.
High Dividend yield also shows that Promoters care for return of shareholders.
Investors should check that Dividend is being paid regularly and should not base
his decision on current year Dividend alone.
High Dividend yield also means that share is not over valued , in general.
Shares with high Dividend yield:-
Karnataka Bank. 4.72
NMDC. 8.47
Dewan Housing. 2.96
Damodar Ind. 3.47
NALCO. 4.25
Indiabulls Venture. 18.59
GMDC. 4.59
Balasore Alloys. 3.39
Flex food. 3.94
Infosys. 5.08
We also have with low PE but no Dividend yield. Investors who are not expert
should prefer shares with high Dividend yield in comparison to shares having
Low PE but no Dividend yield.
For example :-
National Steel PE 4.89
No Dividend for many years
RTS Power. PE 8.29
Last Dividend of 5% 10-11
Empee dist. PE 8.49
Last Dividend 12-13
HFCL PE 8.72
No Dividend for many years
Aksh opti PE 5.68
No Dividend after 2007 , 5% Dividend for December 13
Panyam cement PE 8.37
No Dividend for many years
Investors who are not expert should check Dividend yield and may choose to
prefer higher Dividend yield shares.
Infosys PE 17.47 , Dividend yield 5.08.
If one considers bonus issue of 1:1 in 2014 and another bonus issue of 1:1 in
2015 , the Dividend yield will increase to 20.32%
Our next post will be on Bonus Issue.
Other topics for subsequent posts will be:-
Book Value
Industry PE
High low during year
Return over 5/10 years
Circuit shares
Media / expert recommendation
Profitability check
Funds utilization check
Shareholding
Consolidated results
Entry & exit
Profit booking
Stop loss

4)Coverage of Fundamental Study

Part -1
Fundamental Study has a very wide coverage but at each stage stage , share will
be eliminated if it does not meet investment criteria.
Study is done only if share is available at good PE and has Dividend record
The study covers :-
1)Quarterly result
Moneycontrol or published result
Consistency , other income , exceptional income/ loss , margin ,interest cost
20% shares approx eliminated at this stage.
2) Profit & loss account
Moneycontrol
5 years profit & loss account is checked to verify growth in sales , margin ,
interest cost and net profit.
If there is not even 40% growth in sales & net profit , share is eliminated.
3)5 year Balance Sheet
To see addition to Fixed Assets.
Utilization of loans taken.
Whether loans taken has resulted in additional fixed assets , increased sales and
profit.
If loans taken has increased but funds has been utilized in investment , sundry
debtors or inventory , share is eliminated from further study.
30% of shares remaining after 2) is removed from further study.
4) Industry -if the industry is such where returns are not high , under recession ,
import threat ,very competitive , high Valuation - share is not studied.
I avoid seasonal industry , infrastructure , steel , media , Jewellery.
5) Consolidated Result & Balance sheet
Where consolidated results are more important than standalone result , company
is eliminated from further study.
If company is not getting adequate income from investment in subsidiaries ,
generally I avoid that company.
6)Annual Report
7)Shareholding
8) chart , volume , specially 10 days before & after result
9)Dividend & Bonus policy
10) Company site - promoters , product , Investors information.
11)Media coverage
12) Price of raw material and finished product
I will explain point no 6-12 in another post.

5)Coverage of Fundamental Study

Part-2
6)Annual Report
Fundamental study of a stock is never complete without study of Annual Report.
Annual Report is required to be gone through completely , may be more then one
times.
Directors report mentions about expansion plan, business scenario, loan
sourced/repayment etc.
Details of Promoters shareholding , changes during the year , other major
shareholders.
Auditors report mentions details of comments about loans & advance,
accounting not as per standard, non-provision of interest etc.
Details of other income, exceptional income or loss.
Transaction with related parties , inter- group transactions.
Details of investment - within group or outside group, market value or realisable
value of investments.
Above are some of the important points but through study of Annual Report is a
must for fundamental study.
7) Shareholding
Shareholding of promoters and pledge of shares shows interest of promoters in
the company and financial strength of promoters.
Shareholding by Mutual funds , Institutions , Reputed Investors like Rakesh
Jhunjhunwala etc add strength to the company.
8)Chart & Volume
Chart shows movement of price over a period of time. Company with low volume
should be avoided by small investors.
Chart 10 days before and after result shows interest of market operators in the
share.
If the share has already appreciated significantly before result date , this may
mean result information is in the market.
Price movement before and after result should be analyzed.
9) Dividend & Bonus policy
Companies declaring high Dividend and regular bonus should be preferred
compared to companies paying low Dividend and no bonus.
Larsen & Toubro, Infosys , NESCO etc has given many bonus in 15 years but
Hindalco , Reliance has not given bonus in near past.
10)Company site
Company site gives details of promoters , group company , products ,
manufacturing facilities etc.
If Company is not providing latest result , shareholding pattern and Annual
Report the company may not be considered for investment.
11) Media Coverage
Search media coverage about company on internet , in message boards etc.
Some times , information about legal cases , Income tax raids , plants shut down
etc is available.
12) Price of Raw material & Finished goods
Performance of many companies depends on price of raw- material or finished
product.
Price of Crude , Metals , iron ore , steel, Crude based raw materials is required to
be monitored.
Price of Iron Ore started improving in January and as a result , price of NMDC
started going up.
Fundamental study of a stock covers everything which can impact Profitability of
the company in future.
Above 12 points are major points to be covered , there may be some other points
specific to the company.

7) Industry PE
Industry PE does not serve any significant purpose in selecting stock for
investment.
PE of individual stock is 90% importance , and industry PE 10%.
Industry PE includes earnings of all companies including loss making companies.
Generally , industry PE is much higher then individual stock PE.
For example ,
PE of reliance is 12.78 whereas industry PE is 17.97.
PE of Cosmo Film is 7.46 whereas industry PE is 17.58
Over all , industry PE is not even 1% important in selecting stock for investment

8)Bonus Shares
Companies issuing bonus shares regularly are preferred over companies who do
not issue bonus shares. Issue of bonus shares should be considered while
selecting a share for investment.
Issue of bonus shares shows confidence of management about performance of
company in future.
Issue of bonus shares increases Dividend yield for the Investors.
Bonus shares issued during past 10 years can be checked in Moneycontrol.
I have recommended following companies , who have issued bonus shares:-
1) NESCO-
1:1 on may 29 2010
1:1 on June 12, 2006
2)Anuh Pharma
2:1 June 12, 2015
2:1 August 6, 2010
1:1 April 29, 2006
3)Dewan Housing
1:1 July 23, 2010
4) Cosmo Films
1:1 January 16, 2010
5) Gmdc
1:1 January 30 ,2008
6) Hindustan Zinc
1:1 January 19, 2011
7) Nandan Denim
1:1 October 31, 2006
Larsen & Toubro
1:2 may 22, 2013
1:1 may 29, 2008
1:1 June 7 , 2006
Some of the companies , who have not issued any bonus shares in 10 years:-
Hindalco, AB Nuvo , Grasim of aditya Birla group.
Maruti Suzuki
Tata motors, Tata chemicals ,Indian hotels- Tata group companies .
Investors should prefer companies issuing bonus shares if other parameters of
Valuation , Dividend yield , return on Networth is ok

11) STOP LOSS

It is recommended that at the time of buying share , decide stop loss and follow
that strictly.
Stop Loss can be any percentage but not more than 25% of your cost.
Stop Loss will save Investors from huge loss which may be even 50%- 80% of
your cost.
Stop loss is required due to:-
1) General weakness in market- Nifty fell from 7972 on 1st January 2016 to 6825
on 29 February 2016.
Every share will fall when market is falling. Sell your share at stop loss.
2)Company specific news , quarterly results
Blue star infotech , a strong company of Blue Star group fell 20% on
announcement of Merger with blue star. Sell at stop loss.
Share price of so many companies fall after declaration of quarterly result. Sell
at stop loss.
3) Industry sentiments
Share price may fall due to negative sentiment for the sector.
Steel industry and banks in recent time. Sell at Stop Loss
4) Wrong purchase
If you have purchased share near to yearly high , recent high and the price starts
going down after your purchase , sell at stop loss.
5)Believing media /tips/ experts
Do not believe any one if experts are saying price will recover.
Sell as when stop loss reaches.
This brings us to theory of averaging in loss ( most dangerous and damaging to
investors) , which will be our next post.

12) Averaging in loss

Investors suffer maximum loss due to:-
1)Not having Stop Loss
2)Averaging in loss
There is no limit to which share price can go down, for example:-
1)State Bank of India
From Rs 305 to Rs148
2)Larsen & Toubro
From Rs1886 to Rs 1016
Mid cap and small cap , the fall in price may be even more steep, such as:-
Castex technology - Rs 362 to Rs 5
Aban offshore. -Rs 418 to Rs143
Lycos Internet. Rs 47.25 to 14.30,
If you go on Averaging in loss , with every purchase your loss increases . Never
average in loss but average in profit.
By averaging in profit , your profit will increase with every purchase and if price
falls , chances are , you will remain in profit on sale.