Fundamental Analysis: Guide on Ratios

There are many different areas to look at when performing fundamental analysis. One of the important things to look out for are the financial ratios of the company. These ratios provide a very quick overview of a company which I feel is great especially when filtering out companies! Ratios are easy to understand and it’s a very good place to start off for beginners trying their hands on fundamental analysis! There are many ratios out there and I have chosen a few that are easy to understand and meaningful to talk about which new investors can try their hands on!

Debt Ratio

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Debt ratio can be obtained by taking Total Debt/Total Asset or Debt/Total Equity. This shows you how leveraged a company is. Depending on the type of company, business cycle, and the industry the company is operating in, the debt ratio varies from industry to industry. For example, a company in the growth stage might have a high debt ratio because they need to borrow money to expand their business. Therefore, you need to take into account at what stage of the business cycle is in before you deem it over-leveraged.

Why I like to look at the debt ratio of a company first is because if I don’t feel comfortable with the sort of risk they are taking, then I don’t think it’s a business worth being in my portfolio. Every portfolio has a different risk tolerance and depending on your strategy, put in only the companies that you like and can understand.

Generally, my favourite types of companies are companies that have low to zero debt levels and remaining profitable. There are however, pros and cons to very low debt levels. The pros are obvious, the business is self-sustaining without need for additional cash to finance operations. The cons is that the company is not growing at it’s full potential. Debt is a leverage, a double-edged sword. If used right, it magnifies the gains. If used wrongly, it can potentially be the downfall of the company.

Liquidity Ratio

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Liquidity ratio of a company can be found by looking at either the company’s Current Ratio or Quick Ratio. Why these ratios are important is because they give you a sense of the company’s liquidity. When considering liquidity of a company, it’s all about the cash and cash equivalent. As we all know, cash is the lifeblood of any company. Without cash, a business simply cannot operate efficiently or pay off it’s debts. What results after is the potential liquidation of the company or having to resort to financing their short-term debts with high interest rates. This would then have a direct impact on the share price.

A ratio of >1 is generally good because if you look at the formula to calculate Current Ratio, Current Ratio = Current Asset/Current Liabilities. This means that the company likely has the capability to pay off their short-term obligations. What you need to look out for when considering companies to invest is when Current ratio is <1. It is an indication that the company has more obligations than it has in it’s current assets. However, always do look further into the numbers and balance sheets if you really think the company has potential. These ratios are more for preliminary scanning only and to be used only as a guideline.

Returns Ratio

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You may have always heard about people saying things such as ROA and ROE. These numbers are categorized as efficiency ratios. These ratios depicts the efficiency of the manager running the company. It shows how well the company is at generating returns in terms of it’s Assets(ROA) and Equity(ROE). Generally, the higher these ratios are, the better. Because if an efficient manager can utilize what they have so well, they can do so much more when more money is given to them to invest in the company’s assets and further growth of the company as well as maximize returns for investors.

My eyes would open up whenever I see a company having double-digit ROA and ROE because it speaks well of the people running the company. They must have been soon something right. Of course, always take note if these ratios are sustainable or not and not simply a one-off occurrence. Again, these ratios can be very easily retrieved from SGX’s website which helps greatly when you are doing your research.

Concluding

I hope this post would help you to start off your first fundamental analysis of your investment journey. There are many ratios out there but I felt that these are the few easier ones to understand and to apply. Keep reading, find out more information and understand in greater detail the things you already know! As they say, “Knowledge is power” and it is the same knowledge that will make you profitable as well!

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7 Deadly Investment Sins

The definition of INVESTMENT is as follows: it is money committed or property owned that is acquired for future income. It has two main classes namely: fixed income (e.g., bonds or fixed deposits) and variable income (e.g., property ownership).

Mark Tier, the author of “The Winning Investment Habits of Warren Buffett & George Soros”, argues that they are seven deadly investment sins that unwary investors make.

What is observable with these so-called sins is that they are all irrational investment beliefs. Once you clear your judgment, you can make better financial choices.

SIN #1. BELIEVING YOU NEED TO PREDICT THE MARKET’S NEXT BIG MOVE

Warren Buffett does not believe in predicting the market’s next big move and nor does he care about it. He says that “forecasts may tell you a great deal about the forecaster; they tell you nothing about the future”.

SIN #2. GURU BELIEF

Some people are tempted to listen to “money gurus” that are believed to predict the market. “Media gurus” make their money from discussing about investments, selling their advice or charging fees to manage other people’s money. But, their followers are not all rich. If you could predict the market’s future, wouldn’t you shut your mouth and make a pile of money yourself?

SIN #3. “INSIDE INFORMATION” IS THE WAY TO MAKE REALLY BIG MONEY

Study the companies’ annual reports as Warren Buffett did. He, along with George Soros were once unknown in the investment scenes and now they are making a significant amount of money. You can work your way up the ladder without having to pay for inside information.

SIN #4. DIVERSIFYING

The source of Soros’s success is exactly the same as Buffett’s: a handful of investments that produce huge profits. Knowing the right companies to allocate your money to takes guts, wits, and luck.

SIN #5. TAKE BIG RISKS IN ORDER TO MAKE BIG PROFITS

Like entrepreneurs, successful investors know it is easier to lose money than it is to make it. This is why…they are more concerned with not losing money that making them.

SIN #6. SYSTEM BELIEF

Some people believe that a certain “system” can guarantee investment profits. It is human nature to find patterns and look for the formula. But, by doing so, you are just flushing your money down.

SIN #7. BELIEVING YOU KNOW THE FUTURE AND BEING CERTAIN THAT THE MARKET WILL PROVE YOU RIGHT

This is far more tragic than just believing you can predict the future. The investor who falls under the spell of the seventh deadly investment sin thinks he already knows what the future will bring. Hence, he or she might gamble it all and eventually lose everything.

Image Credits: reynermedia via Flickr

Image Credits: reynermedia via Flickr

These sins tempt investor and cost them an awful lot of money. This is why it is tantamount to avoid these cognitive illusions. 

Sources: Business Dictionary and Wealth Creator

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Learn About Mutual Funds Before Investing

Mutual Funds

Mutual funds are investments that gather the investors’ money into a pool to make multiple types of investments, known as the portfolio.

Professional money or investment managers, who invest the fund’s capital and attempt to produce capital gains for its investors, operate the mutual funds.

The investment manager’s compensation relies on how well the fund performs. In this way, you can be assured that they will work hard to make sure the fund grows well.

Image Credits: Steve Jurvetson via Flickr

Image Credits: Steve Jurvetson via Flickr

As a mutual fund investor, you become a “shareholder” of the mutual fund company. When there are profits you will earn dividends. When there are losses, your shares will decrease in value.

Mutual funds are diversified or are made up of different investments to lower the risk of loss.


Advantages of Mutual Funds

1. Mutual Funds give small investors the access to professionally manage, diversified portfolios of equities, bonds and so on. This is difficult and nearly impossible to create with a small about of money.

2. Each shareholder participates proportionally in the gain or loss of the funds.

3. The experts handle your money professionally…so even if you have little knowledge on stocks, you may learn as time goes.


Three Categories of Mutual Funds

1. EQUITY FUNDS. Equity funds are made up of common stock investments alone. Although this can be riskier, this can earn more money than other types of funds.

2. FIXED-INCOME FUNDS. Fixed-income funds are made up of government and corporate securities. Since the government and corporate securities provide fixed return, the risk of the investments are low.

3. BALANCED FUNDS. Balanced funds combine both stocks and bonds in the investment. It offers a moderate to low risk. So before investing to mutual funds, you will have decide how much risk you are willing to take.

Why Should You Invest in Mutual Funds?

Sources: Investopedia and HowStuffWorks

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What stocks to invest in 2015?

New York Stock Exchange

It is just like the eternal question every year again – what stocks to buy and what to ignore. The question is simple, but the answer is somewhat complex, as there isn’t any easy and straightforward way to respond to it. Investors can choose however different strategies. Like every year there are always certain companies that will grow no matter what the state of the economy does. These rather save investments are perhaps one of the best strategies to follow. But there are also sectors and industries that will be particularly flourishing in 2015.

Certain stocks have been climbing for four years in a row. Better judgement might suggest that there is an end to it. However, certain companies are simply not giving in. Furthermore, the December sell-off is the perfect opportunity for investors to enter the game. Companies like Apple (APPL) have been trending and created nothing but revenue for investors. The Apple stock has generated profits for five consecutive years and there isn’t any indication that 2015 will be different. The reputation of the company’s iOS operating system is better than ever and iPhones are leading the smartphone market. Apple appears to be a no-brainer.

The same holds for other IT stocks. The social media platform Facebook (FB) has enjoyed a 40% increase in the last year alone. Instagram, which is part of Facebook Inc., just reached 300 million active users and is said to have a vast potential for growth. With potential video ads launching on Instgram this year, the Facebook stock is set to climb further. Next to Apple and Facebook stands another giant, which has similar prospects – Google (GOOGL). The market share of the company is beyond belief and easily surpasses the ones of the competitors. No matter whether mobile phone market, online search or services and applications – the sails are set into one direction. Investing in any of these IT brands could be a risky undertaking considering their extremely long runs up the market ladder, but they are clearly not finished yet. Therefore, any of them should be a save investment for 2015.

However, these are not the only stocks, which are predicted to go up. Many other information technology stocks are said to behave similarly. Even the famous heavyweight Goldman says that investment in this sector will bring favourable profits. The growth predictions for this particular industry are set around 9%. This will ensure decent returns for shareholders.

Another investment tip given by many important financial institutes are the big global stock market indices. At least within the first half of 2015 the major indices are expected to grow. Especially the S&P 500, the American stock market index, is according to the forecast of the financial institute Goldman Sachs continuing to increase in value. Since the crash in 2009, the index has doubled in points and even climbed over the value it has had before the crash. Analysts calculate with at least another 5% increase in the first few months of 2015. Also the TOPIX, the Tokyo Stock Price Index, is on an upward spiral and estimated to be even steeper than the American index. Although the Japanese economy has suffered various setbacks in the last years, the predictions for the second most important Japanese stock market index are positive.

Investments not to make are material stocks. As the Chinese economy is experiencing stagnation, the demand for raw materials is going back. The stocks have increased in the last years, however the prediction for 2015 is dim. Most likely the stocks fall deep before they will increase and stabilise again. One should wait until they fall though. The moment when they will fall is unclear, but the fall itself is almost certain. Once the material stocks have considerably decreased, one should consider investing again.

No matter whether coal, oil or base metal – the price is weak. The oil price hit a five-year low and the coal price even went below its 10-year average. The wheels of the commodity super-cycle seem to be stuck in the sand. With oil and coal having increased up to a ten-fold in the last 15 years, the growth has been cut. China and other emerging nations had been responsible for a massive demand of materials. However, slow economies and decreased demand, especially in China, are now creating the halt.

Although major economies, such as Russia and China, are slowing down for different reasons, the Asian market is expected to grow in 2015. The emerging markets of China and India as well as South Korea and Indonesia are not to be underestimated in the next twelve months. Reforms and different policy chances have reduced bureaucracy and enable so economic growth. Furthermore, through policy changes unproductive and ineffective industries and sectors will be more exposed to the order and self-regulation of the markets. One of the best performers of the Asian markets in 2014 was the Deutsche X-Trackers Harvest CSI 300 China (ASHR), which increased by 47%. The steep trend increased especially in the last two months of the year and is therefore a top contender to watch and invest in for the first few months of the New Year.

While still in trouble is 2013, India and Indonesia have stabilised their currencies in 2014, while Korea, Taiwan and Singapore had suffered compared to the US dollar. This however has helped India and Indonesia to push reforms and growth their own markets. The Indonesian iShares MSCI Indonesia ETF (EIDO) grew by over 21% and the Wisdom Tree India Earnings Fund (EPI) could improve by more than 27%. Both of them can be interesting for investors in the next six months. Although both experience occasional setbacks, one could consider them as a long-term investment, as their potential growth could be up to 20% for the next two years.

In general 2015 isn’t looking bad at all. The US market as well as different Asian markets, such as the Indian and Indonesian markets, are expected to grow further, although some have already been growing too long in the opinion of some analysts. Investing in information technology stocks will be the safest bet though.

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What effect does the New Year have on the stock exchange?

Wall Street

The Christmas holidays and the New Year are over and 2015 has finally arrived. But what does that really mean to an investor? Is there any effect at all? Public holidays always create a little turbulence in the market – no matter where and what the holiday is about. This effect can be positive or might have negative influences on the stocks. However, it is important to understand these disturbances and use them to one’s advantage. Reading the market correctly can bring an investor advantages – however, not only for a few trading days, but for the entire year. The movements of the stock exchange before and after the New Year can give indications for the months to come.

The swinging of the stock market around the New Year is also referred to as the January effect. One can generally say that the market and many stocks are going up during the month of January. This is due to the sudden increase of the amount of investors buying stocks. One might naturally question this tendency as pure chance. However, it is statistically recorded that stocks are being bought in January and especially during the first five trading days of the New Year. The question is – why is that the case? It has to do with tax-loss selling. Investors tend to sell those shares that are not bringing any money in the very end of December in order to counterbalance capital gains that have been made during the year. Therefore, the stocks that have been sold in the old year will be at a discount price of their actual value during the first trading days of the coming year (2015). This will trigger a bargain hunt within the first week of trading in 2015. The effect is increased buying pressure in the market. This tendency holds for most markets – no matter whether New York, London or Tokyo. However, the extent of the January effect can vary from market to market.

One should be aware of the fact that the January effect is a mere indication and not a rule. The effect is purely created by the desire to create tax losses in the end of the year. However, investors are starting to use different schemes, such as tax-sheltered retirement plans, to balance their accounts and enjoy tax reductions. For that reason the sell-off can occur in a reduced measure. It however does happen. Bargain hunters should therefore pay attention to whatever was sold off during the last trading days in 2014. If one wants to attempt a profit, one has to look for risky shares and securities. These are mostly sold off in December and are therefore available at a low price. The opposite happens during December. The demand for lower risk securities, such as government bonds, is driven up. Investing early enough into these lower risk securities can potentially generate a substantial increase in value. The art of benefiting from the New Year swing at the stock exchange is connected to front-running the effect. Although the extent is impossible to be predicted precisely, the shift and the tendency are undeniably occurring.

How can the swing predict the tendency of the year and how to read it? As every market has of course their indicators, one cannot make a general prediction for the entire world economy, but has to watch each market individually. For example, the indicator for the US market is the S&P 500, which is the American stock market index. Statistics have shown that if the S&P 500 has a positive gain within the first five trading days of the year, the chance that the American stock market will increase for the rest of the year are extremely high. Similar tendencies and statistics hold for other markets too. Wanting an indication or prediction for the rest of the year, one has to monitor the stock market index. The benchmark index for the Singapore stock market is for example the Straits Times Index. Other important global indices include the S&P 50 for Asia, the DAX for Germany and the Nikkei 225 for Japan.

There are few things to be kept in mind. The January effect tends to be weakened when there is an ongoing recession. As various markets suffer differently from poor economic situations, each market stands for itself. If the American economy is in a recession, it doesn’t mean that the Singaporean economy is instantly affected. The same holds for predictions. These however are important for the January effect. It generally holds that if there is a recession, the January return will be reduced. Furthermore, the extent of the January effect also depends on the institutional investors, such as portfolio managers. As they are responsible for a large extent of the trade, the decisions of the portfolio managers can sway stocks one way or another. Usually if the prediction for the coming year is positive, they tend to invest large amounts in risk security within the first few trading days of the year. The same is true the other way around. Negative economic predictions will keep institutional investors from buying. Therefore, the opinions of these investors can heavily affect the January return.

First of all, the New Year does have an effect on the stock exchange like other holidays as well. However, the effect and the potential benefits are larger than with other holidays. Although the New Year will most likely not be the coup of the country, there are profits to be made. If the January returns are positive, they are usually strong. However, they are not guaranteed. When investing within the first month of the year, one should consider various points. The most important factors are the general prediction for the economy for the coming year and whether there is a recession ongoing. In case both are positive, one should pay attention to the stocks being sold off heavily in the end of the year. These stocks will most likely be available below their real market value when trading resumes in the first week of the New Year.

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