Hi, Anyone to share in layman term how to read and crunch the following financial jargons. Which are the most crucial one to look up for when making decision on buy and sell?
P/E
P/B
P/R
ROA
ROE
NAV/P
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This is tricky, but thought I would share my learnings.
P/E : this is price per share over earnings per share. So basically if the stock has net income of 1.2 per share (you would see this in slides as eps) and its current price is 24, you have P/E of 24/1.2 = 20. So the P/E tells you how many years it has to make its current income for its worth.
The bad thing is its very iffy and things don’t usually work this way because it ignores the underlying asset and its different for industries.
Bad example 1- Keppel DC vs Mapletree Industrial. Trying to compare P/E of the two, you would think Mapletree Industrial is the cheaper stock, but you probably dont know most of Keppel DC’S buildings and land are freehold whereas Mapletree Industrial has those on 99 years lease.
Other bad examples would be comparing stocks with different industries or cyclical business.
So far I avoid those below 4 (tend to be property developers) or above 35, but there isnt much solid grounding to my rules. I am not fond of using this other than to sieve out expensive stocks.
P/B: This is price per share over book value per share. While this tries to give a feel of price vs what assets the share has, it ignores the earnings side. I feel we should have a formula that tries to tie P/E and P/B.
P/R - I dont know this one.
ROA: this should be net income over assets, so companies that are capital intensive have lower ROA. Not only that, companies that hold a lot of cash, investments that generate low returns tend to also exhibit low ROA as it indicates they may not manage their assets efficiently, or just not getting enough income out of those assets.
ROE: Net income over equity. Generally the higher the better, to give this a boost, companies finance their assets with debt, but there are those with that have little debt and still good ROE.
NAV/P - net asset value over share price. This is just the inverse of P/B.
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I think its good to know how they are calculated, but I don’t think its exactly a good idea to pick stocks based on a comparison of them.
They are useful in evaluating a business though, or maybe I should put it this way, if you calculated those out or work in reverse to understand how the business ticks.
Comparing how these numbers change over time, will also give you an idea of how the company become better or worse
Thanks for the info. But it’s still very confusing for a newbie like myself.