## Friday, December 24, 2010

### Analysis Definations (Nse/Bse)

1.P/E Ratio
PE Ratio is price to earnings ratio of a stock/index
lets consider a stock of company ABC, whose price is Rs 100 per share.
there are 100000 shares of the ABC company.
therefore market value (known as market capitalization) of the company is Rs 100 per share * 1 lac shares = Rs 100 lacs (Rs 10 million)

now suppose the company makes Rs 10 lacs profit each year.
then earnings per share (net profit per share) = total profit divided by the number of shares of the company =10 lacs divided by 1 lac = Rs 10 per share.
thus price to earnings ratio of the share = price per share / earnings per share = 100 / 10 =10.

The PE ratio of stock of ABC is 10.

2 Fundamental & Technical Analysis
The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis.

Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value.

Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market.

3 Growth factors
Earning per share (EPS) growth: Represents trailing 12-month EPS growth over the past
two corresponding years.
Sales growth: Represents trailing 12-month sales growth over the past two corresponding
years.
Dividend per share (DPS) growth: Growth in DPS indicates high earnings growth and/or
rising payout ratio over the past two reporting periods.
Operating cash flow per share (OCFPS) growth: Indicates high depreciation and/or high
net income and/or efficient working capital management over the past two reporting periods.
Book value per share (BVPS) growth: Book value represents the equity of the firm.
Growth in book value indicates and/or of high earnings growth and/or low payout ratio and/or
lesser conversion of convertibles or a low rights issue and/or equity issuance at greater than
bps.
EBITDA growth: Represents trailing 12-month EBITDA growth over the past two
corresponding years. Growth in EBITDA indicates high topline growth flowing down to the
EBITDA line or EBITDA margin expansion, i.e., good operational performance.

4 Value factors
Enterprise value ( EV ) to EBITDA: The ratio is meant to give a proxy for value of net
debt and equity divided by EBITDA. A low reading is an indication of good value for debt and
equity holder but can also indicates low EBITDA growth prospects.
Price to book: A low ratio indicates good value, but can also be an indication of lackluster
growth and/or profitability prospects.
Price to earnings: A low ratio indicates good value but can also be an indication of
lackluster growth prospects. The ratio is widely used due to its simplicity.
Price to sales: A low ratio indicates good value but can also be an indication of lackluster
growth prospects and/or low margins currently or in the future.
Price to DPS: A low ratio indicates high earnings growth and/or rising payout ratio, but can
also indicate lackluster growth prospects.
Price to operating cash flow per share (OCFPS): A low ratio indicates efficient working
capital management and/or high depreciation and/or high net income.
Enterprise value (EV) to fixed assets (FA): The ratio is meant to give a proxy for value of
net debt and equity divided by fixed assets available to debt and equity holders. A low
reading is an indication of good value for debt and equity holding but can also indicate lower
fixed assets efficiency level.

5 Quality factors
Return on equity (ROE): Defined as net income divided by common equity. A high ratio
indicates good operational performance and/or financial efficiency, and a high return to
equity shareholder. It also reflect ability to utilise assets effeciently to generate earnings.
Size: Indicates market capitalization of a company. Market capitalization is calculated by
multiplying a company’s shares outstanding by the current market price.
12-month performance/Beta: A high value implies that the stock has performed better
than would have been expected given its beta level, therefore favourable reward/risk profile.
Price earnings to growth (PEG): PEG is a widely used indicator of a stock’s potential value.
It is favored by many over the price/earnings ratio because it also accounts for
growth. Similar to the P/E ratio, a lower PEG means that the stock is more undervalued.
Information coefficient
The information coefficient (IC) is a concise measure of how well a factor is correlated with
(subsequent) returns. It is the correlation coefficient between the factor rank and the return
rank for all companies in the universe for a specific period.
Information coefficient is calculated as:
In order to calculate the significance of IC we have applied
IC T-Stat = sqrt [(n-2)/ (1-r × r)] × r
Where
n = # companies in the universe
r = the correlation coefficient between the two arrays (the IC)

Greek Letters in Investment Equations

·         Alpha (Α, α): Investment return that’s different than you’d expect, given an investment’s beta, which is its exposure to market risk and return. Alpha (which can be positive or negative) describes an intangible value that accounts for the extra return generated (or lost) for the amount of risk taken. Some researchers aren’t sure that alpha exists at all.
·         Beta (Β, β): The market beta is 1, so an investment with a beta of more than 1 is more volatile than the market as a whole. You’d expect the investment to return more than the market in an up year and less than the market in a down year.
·         Delta (Δ, δ): The percentage change in an investment. Delta often describes how much an option changes in price when its underlying security changes in price.
·         Gamma (Γ, γ): The rate of change in delta. Gamma is exposure to any change in price, positive or negative.
Sigma (Σ, σ): Standard deviation, or the likelihood that any one number in a series — like a series of investment returns — will be different from the return that you expect. The higher the standard deviation, the greater the investment risk

#### 1 comment:

1. Thank you for this valuable information about Technical Analysis