what may work in indian stock market
.................................................. ...
1] tipstars days r over..stock stars DAYS r coming
2] definitely VOLATILITY play [prepare a tool/plan to use it...i try to learn now,till date failed]
3] result play...try to know estimate before hand....compare its surprise factor
4] rumor play...who is sponsoring...operator..behind any game...
mind is its RUMOR..
5]buy at pullback
6]longterm contrarian view...what goes up must come down..
7]fund flow...fii..rbi policy
8]YOUR CONFIDENCE..FLEXIBILITY..EXECUTION SKILL
What is Fundamental Analysis
Fundamental analysis is the process of looking at a business at the basic or fundamental financial level. This type of analysis examines key ratios of a business to determine its financial health and gives you an idea of the value its stock.
Many investors use fundamental analysis alone or in combination with other tools to evaluate stocks for investment purposes. The goal is to determine the current worth and, more importantly, how the market values the stock.
Earnings
Its all about earnings. When you come to the bottom line, thats what investors want to know. How much money is the company making and how much is it going to make in the future.
Earnings are profits. It may be complicated to calculate, but thats what buying a company is about. Increasing earnings generally leads to a higher stock price and, in some cases, a regular dividend.
When earnings fall short, the market may hammer the stock. Every quarter, companies report earnings. Analysts follow major companies closely and if they fall short of projected earnings, sound the alarm.
While earnings are important, by themselves they dont tell you anything about how the market values the stock. To begin building a picture of how the stock is valued you need to use some fundamental analysis tools.
Fundamental Analysis Tools
These are the most popular tools of fundamental analysis. They focus on earnings, growth, and value in the market.
Earnings per Share EPS
Price to Earnings Ratio P/E
Projected Earning Growth PEG
Price to Sales P/S
Price to Book P/B
Dividend Payout Ratio
Dividend Yield
Book Value
Return on Equity
No single number from this list is a magic bullet that will give you a buy or sell recommendation by itself, however as you begin developing a picture of what you want in a stock, these numbers will become benchmarks to measure the worth of potential investments.
Mohan,
One has to observe all the ratios over a 3-5 year period and observe how they are increasing/decreasing.
One should also compare all with different companies of the same industry to get a good relative idea. For example the P/E ratio can be compared to the p/e ratios of other companies and p/e ratio of industry.
Another parameter is capital:Free reserves which makes the company a suitable bonus candiadate. Free reserves are out the the earnings of the company and not revaluation of assets.
Stock prices are determined in the marketplace, where seller supply meets buyer demand. There is no clean equation that tells us exactly how a stock price will behave, but we do know a few things about the forces that move a stock up or down. These forces fall into three categories: fundamental factors, technical factors, and market sentiment.
Fundamental Factors
In an efficient market, stock prices would be determined primarily by fundamentals, which, at the basic level, refer to a combination of two things: 1) An earnings base (EPS, for example) and 2) a valuation multiple (a P/E ratio, for example).
An owner of a common stock has a claim on earnings, and earnings per share (EPS) is the owner's return on his or her investment. So, when you buy a stock you are purchasing a proportional share of an entire future stream of earnings. That's the reason for the valuation multiple: it is the price you are willing to pay for the future stream of earnings.
Part of these earnings may be distributed as a dividend, while the remainder will be retained by the company (on your behalf) for reinvestment. We can think of the future earnings stream as a function of both the current level of earnings and the expected growth in this earnings base.
As shown in the diagram, the valuation multiple (P/E), or the stock price as some multiple of EPS, is a way of representing the discounted present value of the anticipated future earnings stream.
Although we are using EPS, an accounting measure, to illustrate the concept of earnings base, there are other measures of earnings power. Many argue that cash-flow based measures are superior. For example, free cash flow per share is used as an alternative measure of earnings power.
The way earnings power is measured may also depend on the type of company. Many industries have their own tailored metrics. Real estate investment trusts (REITs), for example, use a special measure of earnings power called funds from operations (FFO). Relatively mature companies are often measured by dividends per share, which represents what the shareholder actually receives.
About the Valuation Multiple
The valuation multiple expresses expectations about the future. As we already explained, it is fundamentally based on the discounted present value of the future earnings stream. Therefore, the two key factors here are 1) the expected growth in the earnings base, and 2) the discount rate, which is used to calculate the present value of the future stream of earnings. A higher growth rate will earn the stock a higher multiple, but a higher discount rate will earn a lower multiple.
What determines the discount rate? First, it is a function of perceived risk. A riskier stock earns a higher discount rate, which in turn earns a lower multiple. Second, it is a function of inflation (or interest rates, arguably). Higher inflation earns a higher discount rate, which earns a lower multiple (meaning the future earnings are worth less in inflationary environments).
In summary, the key fundamental factors are the following: the level of the earnings base (represented by measures such as EPS, cash flow per share, dividends per share); the expected growth in the earnings base; and the discount rate--which is itself a function of inflation and the perceived risk of the stock.
Forces That Move Stock PricesOctober 8, 2004 | By David Harper, (Contributing Editor - Investopedia Advisor) Email this Article Print this Article Comments Add to del.icio.us
Other RSS Readers
Stock prices are determined in the marketplace, where seller supply meets buyer demand. There is no clean equation that tells us exactly how a stock price will behave, but we do know a few things about the forces that move a stock up or down. These forces fall into three categories: fundamental factors, technical factors, and market sentiment.Fundamental FactorsIn an efficient market, stock prices would be determined primarily by fundamentals, which, at the basic level, refer to a combination of two things: 1) An earnings base (EPS, for example) and 2) a valuation multiple (a P/E ratio, for example).
An owner of a common stock has a claim on earnings, and earnings per share (EPS) is the owner's return on his or her investment. So, when you buy a stock you are purchasing a proportional share of an entire future stream of earnings. That's the reason for the valuation multiple: it is the price you are willing to pay for the future stream of earnings.Part of these earnings may be distributed as a dividend, while the remainder will be retained by the company (on your behalf) for reinvestment. We can think of the future earnings stream as a function of both the current level of earnings and the expected growth in this earnings base.As shown in the diagram, the valuation multiple (P/E), or the stock price as some multiple of EPS, is a way of representing the discounted present value of the anticipated future earnings stream. (To learn about present value, see "Understanding the Time Value of Money.") About the Earnings BaseAlthough we are using EPS, an accounting measure, to illustrate the concept of earnings base, there are other measures of earnings power. Many argue that cash-flow based measures are superior. For example, free cash flow per share is used as an alternative measure of earnings power.The way earnings power is measured may also depend on the type of company. Many industries have their own tailored metrics. Real estate investment trusts (REITs), for example, use a special measure of earnings power called funds from operations (FFO). Relatively mature companies are often measured by dividends per share, which represents what the shareholder actually receives.About the Valuation MultipleThe valuation multiple expresses expectations about the future. As we already explained, it is fundamentally based on the discounted present value of the future earnings stream. Therefore, the two key factors here are 1) the expected growth in the earnings base, and 2) the discount rate, which is used to calculate the present value of the future stream of earnings. A higher growth rate will earn the stock a higher multiple, but a higher discount rate will earn a lower multiple.What determines the discount rate? First, it is a function of perceived risk. A riskier stock earns a higher discount rate, which in turn earns a lower multiple. Second, it is a function of inflation (or interest rates, arguably). Higher inflation earns a higher discount rate, which earns a lower multiple (meaning the future earnings are worth less in inflationary environments).In summary, the key fundamental factors are the following: the level of the earnings base (represented by measures such as EPS, cash flow per share, dividends per share); the expected growth in the earnings base; and the discount rate--which is itself a function of inflation and the perceived risk of the stock.ADVERTISEMENTGet your choice of several FREE Investing Education kits mailed Today!
Learn to trade the markets like a Pro! Explore our wide range of FREE offers including CD-ROMs, Books, Home Study Courses, Software, and even Trade Recommendations. Click Here to see the FREE Offers.
Technical FactorsThings would be easier if only fundamental factors set stock prices! Technical factors are the mix of external conditions that alters the supply of and demand for a company's stock. Some of these indirectly affect fundamentals. (For example, economic growth indirectly contributes to earnings growth.) Technical factors include the following: Inflation - We mentioned inflation as an input into the valuation multiple. But inflation is a huge driver from a technical perspective as well. Historically, low inflation has had a strong inverse correlation with valuations (low inflation drives high multiples, and high inflation drives low multiples). Deflation, on the other hand, is generally bad for stocks because it signifies a loss in pricing power for companies. Economic strength of market and peers - Company stocks tend to track with the market and with their sector or industry peers. Some prominent investment firms argue that the combination of overall market and sector movements--as opposed to a company's individual performance--determines a majority of a stock's movement. (There has been research cited that suggests the economic/market factors account for 90%!) For example, a suddenly negative outlook for one retail stock often hurts other retail stocks as "guilt by association" drags down demand for the whole sector. Substitutes - Companies compete for investment dollars with other asset classes on a global stage. These include corporate bonds, government bonds, commodities, real estate, and foreign equities. The relation between demand for U.S. equities and their substitutes is hard to figure, but it plays an important role. Incidental transactions - Incidental transactions are purchases or sales of a stock that are motivated by something other than belief in the intrinsic value of the stock. These transactions include executive insider transactions, which are often pre-scheduled or driven by portfolio objectives. Another example is an institution buying or shorting a stock to hedge some other investment. Although these transactions may not represent official "votes cast" for or against the stock, they do impact supply and demand and therefore can move the price.
these two dynamics: 1) middle-aged investors are peak earners who tend to invest in the stock market, while 2) older investors tend to pull out of the market in order to meet the demands of retirement. The hypothesis is that the greater the proportion of middle-aged investors among the investing population, the greater the demand for equities and the higher the valuation multiples.
Trends - Often a stock simply moves according to a short-term trend. On the one hand, a stock that is moving up can gather momentum, as "success breeds success" and popularity buoys the stock higher. On the other hand, a stock sometimes behaves the opposite way in a trend and does what is called "reverting to the mean." Unfortunately, because trends cut both ways and are more obvious in hindsight, knowing that stocks are "trendy" does not help us predict the future. (Note: trends could also be classified under market sentiment.)
Liquidity - Liquidity is an important and sometimes under-appreciated factor. It refers to how much investor interest and attention a specific stock has. Wal-Mart's stock is highly liquid and therefore highly responsive to material news; the average small-cap company is less so. Trading volume is one proxy for liquidity. But it is also a function of corporate communications (that is, the degree to which the company is getting attention from the investor community). Large-cap stocks have high liquidity: they are well followed and heavily transacted. Many small-cap stocks suffer from an almost permanent "liquidity discount" because they simply are not on investors' radar screens.
Market Sentiment
Market sentiment refers to the psychology of market participants, individually and collectively. This is perhaps the most vexing category because we know it matters critically, but we are only beginning to understand it. Market sentiment is often subjective, biased, and obstinate. For example, you can make a solid judgment about a stock's future growth prospects, and the future may even confirm your projections, but in the meantime the market may myopically dwell on a single piece of news that keeps the stock artificially high or low. And you can sometimes wait a long time in the hopes that other investors will notice the fundamentals.
Market sentiment is being explored by the relatively new field of behavioral finance. It starts with the assumption that markets are apparently not efficient much of the time, and this inefficiency can be explained by psychology and other social sciences. The idea of applying social science to finance was fully legitimized when Daniel Kahneman, a psychologist, won the 2002 Nobel Prize in Economics. (He was the first psychologist to do so.) Many of the ideas in behavioral finance confirm observable suspicions: that investors tend to overemphasize data that come easily to mind; that many investors react with greater pain to losses than with pleasure to equivalent gains; and that investors tend to persist in a mistake.
Some investors claim to be able to capitalize on the theory of behavioral finance. For the majority, however, the field is new enough to serve as the "catch-all" category: everything we cannot explain is deposited into this inexplicable category.
Summary If one could work out a formula to give you a concrete answer on a stock, the markets wouldnt exist and money wouldnt change hands. Bottomline is recognition and understanding comes via experience and after years of trading. Beyond the figures and the analysis one has to trust one s gut, and take calculated risks. That in my opinion is the only way to understand the share pr movements.
lower p/e ratio coupled with high book value is very good for LONG term investments. Whereas if the scrip is a FANCIED scrip, even with high p/e, it may quote more. those scrips may be good for short term. hence, companies with low p/e ratio which are not fancied may take a long time to appreciate. but they are worth investing for long term
The Little Book That Beats the Market - Joel Greenblatt
Contrary to efficient-market naysayers, this engaging investment primer contends that ordinary stock-market investors can indeed get better-than-market returns over the long haul. Greenblatt (You Can Be a Stock Market Genius), a Columbia Business School adjunct professor, touts a "value-oriented" approach that looks for bargain stocks whose share price is cheap relative to the company's profitability. His version is a "magic formula" that ranks stocks on the basis of two variablesthe earnings yield and the business's return on capital. His Web site, magicformulainvesting.com, virtually automates the procedure for novices. Greenblatt offers lots of statistical proof of the formula's success, but emphasizes the importance of faith in seeing the investor through inevitable short-term downturns: "It will be your belief in the overwhelming logic of the magic formula that will make the formula work for you in the long run." He conveys his ideas through a lucid if rudimentary and rather corny explanation of basic investment concepts about risk, return, interest and business valuation. Although the fabulous returns he touts seem too good to be true, Greenblatt's formula is a reasonable variant of mainstream value-investing methods. Investors seeking a little more hands-on excitement than the average mutual fund offers won't go too far wrong following his advice. (Jan.)
Hallo,
I accept the importance of TA in trading, but Funda is Funda, cannot be ignored.
When mkt goes up up & up i.e. because of Fii,s Dealings also & same thing in case of Downnnn
So i think FII net purchse & sale trend should also be considered.
I salute to all my investor friends, and i wonder is you know something about CANSLIM strategy by William O'Neil and his book "How to make money in stocks" if you got a copy of that book in a pdf format. I really appreciate
PEG is the ratio of the Price Earnings Ratio to the expected Growth of the companies earnings per share.
PEG < 1 is a great Buy
A very high PEG means the stock is overvalued.
A PEG=1 implies fair valuation
Try 'Investment Valuation' and 'Damodaran on Valuation' by Aswath Damodaran. Here is a link of the second edition of 'Investment
It's an unfortunate fact that few investors can consistently beat the market. That's because it often takes one or more of the following rare traits...
1)The vision to identify breakthrough products, leaders, and brands
2)The knowledge to spot an undervalued gem in a sea of glass
3)The courage to buy and hold when others are running scared
Occasionally, you'll come across an investor with one of these valuable characteristics. And it's likely that person does quite well. But almost no one I know of can offer all three. That would take two very different possibly even fiercely competitive approaches...
4) The courage to not get depressed when everyone around him is making money and he is not (the investor is not envious).
What underlies every chart, every quote? - A COMPANY. Buy into that company my friend, where you find some value, not just some figures & pictures.
Warren Buffet doesn't ever needs charts he buy & holds onto a stock as long as he finds value in it. (And finding value is not bereft of arithmetic but it's a different kind of arithmetic
Try www.indiaearnings.com. Registration required
The best things in life are said to be free and the same holds true for cash flow! Investors love companies that produce plenty of free cash flow (FCF). It signals a company's ability to repay debt, pay dividends, buy back stock and facilitate the growth of business all important undertakings from an investor's point of view. In the past we have given our readers a perspective on valuation parameters like price to earnings (P/E) and price to book value (P/BV). While both these valuation parameters reflect the present earning capabilities, they do not signal the future prospects.
How and what of FCF
The formula for calculating Free Cash Flow (FCF) is as:
Net Profit + Depreciation Capital expenditure Changes in working capital Dividend
FCF takes into account not only the earnings of the company but also the past (depreciation) and present capital expenditures, capital inflows and investment in working capital. Growing free cash flows are frequently a prelude to increased earnings. Companies that experience surging FCF due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distribution (from subsidiaries) or debt elimination can reward investors in the future. Better free cash flows are therefore a reason for the investment community to cherish. On the other hand, an insufficient FCF for earnings growth can force a company to boost its debt levels. Even worse, a company without enough FCF may not have the liquidity to stay in business
From a companys point
better FCF definitely indicates better efficiency on the part of the company. But what is pertinent for investors to note is that simply assessing the FCF on the basis of its absolute value is not prudent. It is imperative to also assess as to what components have contributed to the same.
Let us take a hypothetical example of two companies, A and B, both of which have garnered the same FCF for the current financial year.
Estimated free cash flow
(Rs) Company A Company B
Net profit 75 120
Add: depreciation / amortisation 20 5
Less: Capital expenditure 5 15
Add/ (Less): Decrease /(Increase)in wkg capital 10 (10)
Less: Dividend 20 20
Free cash flow 80 80
Prima facie although appearing similar, if you delve a little deeper there is a stark difference in their performances. While company A, despite having lower earnings has benefited by adding back depreciation and decrease in working capital, company B has invested in capex and working capital. This indicates that while company B is investing for future growth, company A is not sufficiently geared up for the impending challenges. This also means that investors in company B can expect rewards in
PRINT THIS E-MAIL THIS FEEDBACK
OUTLOOK ARENA >> VIEWS ON NEWS >> MAY 13, 2005
Free cash flow: Is it free after all?
MYSTOCKS | FREE NEWSLETTER
The best things in life are said to be free and the same holds true for cash flow! Investors love companies that produce plenty of free cash flow (FCF). It signals a company's ability to repay debt, pay dividends, buy back stock and facilitate the growth of business all important undertakings from an investor's point of view. In the past we have given our readers a perspective on valuation parameters like price to earnings (P/E) and price to book value (P/BV). While both these valuation parameters reflect the present earning capabilities, they do not signal the future prospects.
How and what of FCF
The formula for calculating Free Cash Flow (FCF) is as:
Net Profit + Depreciation Capital expenditure Changes in working capital Dividend
FCF takes into account not only the earnings of the company but also the past (depreciation) and present capital expenditures, capital inflows and investment in working capital. Growing free cash flows are frequently a prelude to increased earnings. Companies that experience surging FCF due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distribution (from subsidiaries) or debt elimination can reward investors in the future. Better free cash flows are therefore a reason for the investment community to cherish. On the other hand, an insufficient FCF for earnings growth can force a company to boost its debt levels. Even worse, a company without enough FCF may not have the liquidity to stay in business
From a companys point of view
A better FCF definitely indicates better efficiency on the part of the company. But what is pertinent for investors to note is that simply assessing the FCF on the basis of its absolute value is not prudent. It is imperative to also assess as to what components have contributed to the same.
Let us take a hypothetical example of two companies, A and B, both of which have garnered the same FCF for the current financial year.
Estimated free cash flow
(Rs) Company A Company B
Net profit 75 120
Add: depreciation / amortisation 20 5
Less: Capital expenditure 5 15
Add/ (Less): Decrease /(Increase)in wkg capital 10 (10)
Less: Dividend 20 20
Free cash flow 80 80
Prima facie although appearing similar, if you delve a little deeper there is a stark difference in their performances. While company A, despite having lower earnings has benefited by adding back depreciation and decrease in working capital, company B has invested in capex and working capital. This indicates that while company B is investing for future growth, company A is not sufficiently geared up for the impending challenges. This also means that investors in company B can expect rewards in future while those in company A should sit up and take notice of what is ailing it.
FY06E Price FCF P/FCF
SBI 612 203.9 3.0
ONGC 874 131.3 6.7
Tisco 354 26.2 13.5
BHEL 831 31.6 26.3
Infosys 2039 51 40.0
Ranbaxy 965 19.6 49.2
HLL 132 1.9 69.5
From a sectors point of view
As explained earlier, cash flows are dependant on the capital expenditure and working capital liabilities borne by the company. This however, differs as per the dynamics of the sector in which the company is operating and should be seen in that light. While sectors like banking require minimum expenditure on capex (as a % of their turnover) those in pharma, engineering, FMCG or commodity sectors require to invest a substantial amount in R&D and capacity expansions. Thus, you would find SBI trading at a very attractive price to free cash flow valuation of 3 times, while an equally competitive Infosys is trading at 40 times (due to lower cash flows).
To conclude...
FCF is not only a mirror image of the present but also a sneak preview into the future. The implications of the components of cash flow may not be explained in the annual reports, but is left to the investors prudence to diligently scrutinize the same and try to read between the lines. The legendry investor Benjamin Graham once said, The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than worth his purchase
What Is Free Cash Flow?
By establishing how much cash a company has after paying its bills for ongoing activities and growth, FCF is a measure that aims to cut through the arbitrariness and "guesstimations" involved in reported earnings. Regardless of whether a cash outlay is counted as an expense in the calculation of income or turned into an asset on the balance sheet, free cash flow tracks the money.
To calculate FCF, make a beeline for the company's cash flow statement and balance sheet. There you will find the item cash flow from operations (also referred to as "operating cash"). From this number subtract estimated capital expenditure required for current operations:
Cash Flow From Operations (Operating Cash) - Capital Expenditure ---------------------------= Free Cash Flow
To do it another way, grab the income statement and balance sheet. Start with net income and add back charges for depreciation and amortization. Make an additional adjustment for changes in working capital, which is done by subtracting current liabilities from current assets. Then subtract capital expenditure, or spending on plants and equipment
By establishing how much cash a company has after paying its bills for ongoing activities and growth, FCF is a measure that aims to cut through the arbitrariness and "guesstimations" involved in reported earnings. Regardless of whether a cash outlay is counted as an expense in the calculation of income or turned into an asset on the balance sheet, free cash flow tracks the money.
To calculate FCF, make a beeline for the company's cash flow statement and balance sheet. There you will find the item cash flow from operations (also referred to as "operating cash"). From this number subtract estimated capital expenditure required for current operations:
Cash Flow From Operations (Operating Cash) - Capital Expenditure ---------------------------= Free Cash Flow
To do it another way, grab the income statement and balance sheet. Start with net income and add back charges for depreciation and amortization. Make an additional adjustment for changes in working capital, which is done by subtracting current liabilities from current assets. Then subtract capital expenditure, or spending on plants and equipment
Net income + Depreciation/Amortization - Change in Working Capital - Capital Expenditure ---------------------------- = Free Cash Flow
It might seem odd to add back depreciation/amortization since it accounts for capital spending. The reasoning behind the adjustment, however, is that free cash flow is meant to measure money being spent right now, not transactions that happened in the past. This makes FCF a useful instrument for identifying growing companies with high up-front costs, which may eat into earnings now but have the potential to pay off later.
What Does Free Cash Flow Indicate?
Growing free cash flows are frequently a prelude to increased earnings. Companies that experience surging FCF - due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distributions or debt elimination - can reward investors tomorrow. That is why many in the investment community cherish FCF as a measure of value. When a firm's share price is low and free cash flow is on the rise, the odds are good that earnings and share value will soon be on the up.
By contrast, shrinking FCF signals trouble ahead. In the absence of decent free cash flow, companies are unable to sustain earnings growth. An insufficient FCF for earnings growth can force a company to boost its debt levels. Even worse, a company without enough FCF may not have the liquidity to stay in business.
Free Cash Flow: Free, But Not Always EasySeptember 17, 2003 | By Ben McClure, Contributor - Investopedia Advisor Email this Article Print this Article Comments Add to del.icio.us
Other RSS Readers
The best things in life are free, and the same holds true for cash flow. Smart investors love companies that produce plenty of free cash flow (FCF). It signals a company's ability to pay debt, pay dividends, buy back stock and facilitate the growth of business - all important undertakings from an investor's perspective. However, while free cash flow is a great gauge of corporate health, it does have its limits and is not immune to accounting trickery. What Is Free Cash Flow? By establishing how much cash a company has after paying its bills for ongoing activities and growth, FCF is a measure that aims to cut through the arbitrariness and "guesstimations" involved in reported earnings. Regardless of whether a cash outlay is counted as an expense in the calculation of income or turned into an asset on the balance sheet, free cash flow tracks the money. To calculate FCF, make a beeline for the company's cash flow statement and balance sheet. There you will find the item cash flow from operations (also referred to as "operating cash"). From this number subtract estimated capital expenditure required for current operations: Cash Flow From Operations (Operating Cash) - Capital Expenditure ---------------------------= Free Cash Flow
To do it another way, grab the income statement and balance sheet. Start with net income and add back charges for depreciation and amortization. Make an additional adjustment for changes in working capital, which is done by subtracting current liabilities from current assets. Then subtract capital expenditure, or spending on plants and equipment: Net income + Depreciation/Amortization - Change in Working Capital - Capital Expenditure ---------------------------- = Free Cash Flow
It might seem odd to add back depreciation/amortization since it accounts for capital spending. The reasoning behind the adjustment, however, is that free cash flow is meant to measure money being spent right now, not transactions that happened in the past. This makes FCF a useful instrument for identifying growing companies with high up-front costs, which may eat into earnings now but have the potential to pay off later. What Does Free Cash Flow Indicate? Growing free cash flows are frequently a prelude to increased earnings. Companies that experience surging FCF - due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distributions or debt elimination - can reward investors tomorrow. That is why many in the investment community cherish FCF as a measure of value. When a firm's share price is low and free cash flow is on the rise, the odds are good that earnings and share value will soon be on the up. By contrast, shrinking FCF signals trouble ahead. In the absence of decent free cash flow, companies are unable to sustain earnings growth. An insufficient FCF for earnings growth can force a company to boost its debt levels. Even worse, a company without enough FCF may not have the liquidity to stay in business. Is Free Cash Flow Foolproof? Although it provides a wealth of valuable information that investors really appreciate, FCF is not infallible. Crafty companies still have leeway when it comes to accounting sleight of hand. Without a regulatory standard for determining FCF, investors often disagree on exactly which items should and should not be treated as capital expenditures. Investors must therefore keep an eye on companies with high levels of FCF to see if these companies are under-reporting capital expenditure and R&D. Companies can also temporarily boost FCF by stretching out their payments, tightening payment collection policies and depleting inventories. These activities diminish current liabilities and changes to working capital. But the impacts are likely to be temporary. The Trick of Hiding Receivables Let's look at yet another example of FCF tomfoolery, which involves specious calculations of the current accounts receivable. When a company reports revenue, it records an account receivable, which represents cash that is yet to be received. The revenues then increase net income and cash from operations, but that increase is typically offset by an increase in current accounts receivable, which are then subtracted from cash from operations. When companies record their revenues as such, the net impact on cash from operations and free cash flow should be zero since no cash has been received.
Secondly, Cash Flow Statement can give an idea about cash-generation capability of the business. Thus, it's helpful for those who are interested in knowing the liquidity position of the organization like creditors or those shareholders who are interested in Dividends. However, it's not really a tool of detecting fraud. We must remember that both Enron & Worldcom used to provide Cash Flow Statement.
The gap between Cash Flow and Earnings has to be seen in light with that during the previous financial years as well as the average for the industry. Besides, year end window-dressing will certainly not generate any cash flow for the year but current year's Cash Flow will certainly include cash generated as a result of window dressing which took place at the end of the previous year.
A wide gap between cash flow and earnings may indicate that all is not well for the company but one can't jump to the conclusion only on the basis of this gap that the accounts have been manipulated.
try on icicidirect.com in research "multex global"
Most traders ignore reward/risk ratios, hoping that luck will save them when things start to go bad.
This is probably the main reason so many of them are destined to fail. It's really dumb when you think about it, because reward/risk is the easiest way to get a definable edge on the market house.
The reward/risk equation builds a safety net around your open positions. It's designed to tell you how much can be won, or lost, on each trade you take. The secondary purpose is to remove emotion so you can focus squarely on the cold, hard numbers.
Let's look at 15 ways that reward/risk will improve your trading performance.
1. Every setup carries a directional probability that reflects a specific pattern. Always execute positions in the highest-odds direction. Exit your trades when a price fails to respond according to your expectations.
2. Every setup has a price level that violates the pattern. Only take trades where price needs to move a short distance to hit this "risk target." Look the other way and find the "reward target" at the next support or resistance level. Trade positions with the highest reward target to risk target ratios.
3. Markets move in trend and countertrend waves. Many traders panic during countertrends and exit good positions out of fear. After every trend in your favor, decide how much you're willing to give back when things turn against you.
4. What you don't see will hurt you. Back up and look for past highs and lows your trade must pass through to get to the reward target. Each price level will present an obstacle that must be overcome.
5. Time impacts reward/risk as efficiently as price. Choose a holding period based on the distance from your entry to the reward target. Then use price and time for stop-loss management. Also use time to exit trades even when price stops haven't been hit.
6. Forgo marginal positions and wait for the best opportunities. Prepare to experience long periods of boredom between frantic surges of concentration. Expect to stand aside, wait and watch when the markets have nothing to offer.
7. Good setups come in various shades of gray. Analyze conflicting information and jump in when enough ducks line up in a row. Often the best thing to do is calculate how much you'll lose if you're wrong, and then take the trade.
8. Careful stock selection controls risk better than any stop-loss system. Realize that standing aside requires as much deliberation as an entry or an exit, and must be considered on every setup.
9. Every trader has a different risk tolerance. Follow your natural tendencies rather than chasing the crowd. If you can't sleep at night, you're trading over your head and need to cut your risk. Lot of talk the past few months regarding these three....especially on stagflation.Few interesting reads.........
http://www.investopedia.com/universi...inflation1.asp
http://www.investopedia.com/terms/d/deflation.asp
http://www.investopedia.com/ask/answers/202.asp
http://www.investopedia.com/terms/s/stagflation.asp
http://www.indiadaily.com/editorial/2119.asp
http://www.safehaven.com/article-2829.htm
10. Never enter a position without knowing the exit. Trading is never a buy-and-hold exercise. Define your exit price in advance, and then stick to it when the stock gets there.
11. Information doesn't equal profit. Charts evolve slowly from one setup to the next. In between, they emit noise in which elements of risk and reward conflict with each other.
12. Don't be fooled by beginner's luck. Trading longevity requires strict self-discipline. It's easy to make money for short periods of time. The markets will take back every penny until you develop a sound risk-management plan.
13. Enter positions at low risk and exit them at high risk. This often parallels to buying at support and selling at resistance, but it can also be used to trade momentum with safety and precision.
14. Look to exit in wild times in order to increase your reward. Wait for price acceleration and feed your position into the hungry hands of other traders just as the price pushes into a high-risk zone.
15. Manage risk on both sides of the trade. Focus on optimizing entry and exit points and specialize in single, direct price waves. Remember that the execution of low-risk entries into bad positions allows more flexibility than high-risk entries into good positions.
Do some research on the basis of EPS, PE and their competitors in the sector also company future plans and past growth. You will get fair idea about your query.
...........................................
.................................................. ...
1] tipstars days r over..stock stars DAYS r coming
2] definitely VOLATILITY play [prepare a tool/plan to use it...i try to learn now,till date failed]
3] result play...try to know estimate before hand....compare its surprise factor
4] rumor play...who is sponsoring...operator..behind any game...
mind is its RUMOR..
5]buy at pullback
6]longterm contrarian view...what goes up must come down..
7]fund flow...fii..rbi policy
8]YOUR CONFIDENCE..FLEXIBILITY..EXECUTION SKILL
What is Fundamental Analysis
Fundamental analysis is the process of looking at a business at the basic or fundamental financial level. This type of analysis examines key ratios of a business to determine its financial health and gives you an idea of the value its stock.
Many investors use fundamental analysis alone or in combination with other tools to evaluate stocks for investment purposes. The goal is to determine the current worth and, more importantly, how the market values the stock.
Earnings
Its all about earnings. When you come to the bottom line, thats what investors want to know. How much money is the company making and how much is it going to make in the future.
Earnings are profits. It may be complicated to calculate, but thats what buying a company is about. Increasing earnings generally leads to a higher stock price and, in some cases, a regular dividend.
When earnings fall short, the market may hammer the stock. Every quarter, companies report earnings. Analysts follow major companies closely and if they fall short of projected earnings, sound the alarm.
While earnings are important, by themselves they dont tell you anything about how the market values the stock. To begin building a picture of how the stock is valued you need to use some fundamental analysis tools.
Fundamental Analysis Tools
These are the most popular tools of fundamental analysis. They focus on earnings, growth, and value in the market.
Earnings per Share EPS
Price to Earnings Ratio P/E
Projected Earning Growth PEG
Price to Sales P/S
Price to Book P/B
Dividend Payout Ratio
Dividend Yield
Book Value
Return on Equity
No single number from this list is a magic bullet that will give you a buy or sell recommendation by itself, however as you begin developing a picture of what you want in a stock, these numbers will become benchmarks to measure the worth of potential investments.
Mohan,
One has to observe all the ratios over a 3-5 year period and observe how they are increasing/decreasing.
One should also compare all with different companies of the same industry to get a good relative idea. For example the P/E ratio can be compared to the p/e ratios of other companies and p/e ratio of industry.
Another parameter is capital:Free reserves which makes the company a suitable bonus candiadate. Free reserves are out the the earnings of the company and not revaluation of assets.
Stock prices are determined in the marketplace, where seller supply meets buyer demand. There is no clean equation that tells us exactly how a stock price will behave, but we do know a few things about the forces that move a stock up or down. These forces fall into three categories: fundamental factors, technical factors, and market sentiment.
Fundamental Factors
In an efficient market, stock prices would be determined primarily by fundamentals, which, at the basic level, refer to a combination of two things: 1) An earnings base (EPS, for example) and 2) a valuation multiple (a P/E ratio, for example).
An owner of a common stock has a claim on earnings, and earnings per share (EPS) is the owner's return on his or her investment. So, when you buy a stock you are purchasing a proportional share of an entire future stream of earnings. That's the reason for the valuation multiple: it is the price you are willing to pay for the future stream of earnings.
Part of these earnings may be distributed as a dividend, while the remainder will be retained by the company (on your behalf) for reinvestment. We can think of the future earnings stream as a function of both the current level of earnings and the expected growth in this earnings base.
As shown in the diagram, the valuation multiple (P/E), or the stock price as some multiple of EPS, is a way of representing the discounted present value of the anticipated future earnings stream.
Although we are using EPS, an accounting measure, to illustrate the concept of earnings base, there are other measures of earnings power. Many argue that cash-flow based measures are superior. For example, free cash flow per share is used as an alternative measure of earnings power.
The way earnings power is measured may also depend on the type of company. Many industries have their own tailored metrics. Real estate investment trusts (REITs), for example, use a special measure of earnings power called funds from operations (FFO). Relatively mature companies are often measured by dividends per share, which represents what the shareholder actually receives.
About the Valuation Multiple
The valuation multiple expresses expectations about the future. As we already explained, it is fundamentally based on the discounted present value of the future earnings stream. Therefore, the two key factors here are 1) the expected growth in the earnings base, and 2) the discount rate, which is used to calculate the present value of the future stream of earnings. A higher growth rate will earn the stock a higher multiple, but a higher discount rate will earn a lower multiple.
What determines the discount rate? First, it is a function of perceived risk. A riskier stock earns a higher discount rate, which in turn earns a lower multiple. Second, it is a function of inflation (or interest rates, arguably). Higher inflation earns a higher discount rate, which earns a lower multiple (meaning the future earnings are worth less in inflationary environments).
In summary, the key fundamental factors are the following: the level of the earnings base (represented by measures such as EPS, cash flow per share, dividends per share); the expected growth in the earnings base; and the discount rate--which is itself a function of inflation and the perceived risk of the stock.
Forces That Move Stock PricesOctober 8, 2004 | By David Harper, (Contributing Editor - Investopedia Advisor) Email this Article Print this Article Comments Add to del.icio.us
Other RSS Readers
Stock prices are determined in the marketplace, where seller supply meets buyer demand. There is no clean equation that tells us exactly how a stock price will behave, but we do know a few things about the forces that move a stock up or down. These forces fall into three categories: fundamental factors, technical factors, and market sentiment.Fundamental FactorsIn an efficient market, stock prices would be determined primarily by fundamentals, which, at the basic level, refer to a combination of two things: 1) An earnings base (EPS, for example) and 2) a valuation multiple (a P/E ratio, for example).
An owner of a common stock has a claim on earnings, and earnings per share (EPS) is the owner's return on his or her investment. So, when you buy a stock you are purchasing a proportional share of an entire future stream of earnings. That's the reason for the valuation multiple: it is the price you are willing to pay for the future stream of earnings.Part of these earnings may be distributed as a dividend, while the remainder will be retained by the company (on your behalf) for reinvestment. We can think of the future earnings stream as a function of both the current level of earnings and the expected growth in this earnings base.As shown in the diagram, the valuation multiple (P/E), or the stock price as some multiple of EPS, is a way of representing the discounted present value of the anticipated future earnings stream. (To learn about present value, see "Understanding the Time Value of Money.") About the Earnings BaseAlthough we are using EPS, an accounting measure, to illustrate the concept of earnings base, there are other measures of earnings power. Many argue that cash-flow based measures are superior. For example, free cash flow per share is used as an alternative measure of earnings power.The way earnings power is measured may also depend on the type of company. Many industries have their own tailored metrics. Real estate investment trusts (REITs), for example, use a special measure of earnings power called funds from operations (FFO). Relatively mature companies are often measured by dividends per share, which represents what the shareholder actually receives.About the Valuation MultipleThe valuation multiple expresses expectations about the future. As we already explained, it is fundamentally based on the discounted present value of the future earnings stream. Therefore, the two key factors here are 1) the expected growth in the earnings base, and 2) the discount rate, which is used to calculate the present value of the future stream of earnings. A higher growth rate will earn the stock a higher multiple, but a higher discount rate will earn a lower multiple.What determines the discount rate? First, it is a function of perceived risk. A riskier stock earns a higher discount rate, which in turn earns a lower multiple. Second, it is a function of inflation (or interest rates, arguably). Higher inflation earns a higher discount rate, which earns a lower multiple (meaning the future earnings are worth less in inflationary environments).In summary, the key fundamental factors are the following: the level of the earnings base (represented by measures such as EPS, cash flow per share, dividends per share); the expected growth in the earnings base; and the discount rate--which is itself a function of inflation and the perceived risk of the stock.ADVERTISEMENTGet your choice of several FREE Investing Education kits mailed Today!
Learn to trade the markets like a Pro! Explore our wide range of FREE offers including CD-ROMs, Books, Home Study Courses, Software, and even Trade Recommendations. Click Here to see the FREE Offers.
Technical FactorsThings would be easier if only fundamental factors set stock prices! Technical factors are the mix of external conditions that alters the supply of and demand for a company's stock. Some of these indirectly affect fundamentals. (For example, economic growth indirectly contributes to earnings growth.) Technical factors include the following: Inflation - We mentioned inflation as an input into the valuation multiple. But inflation is a huge driver from a technical perspective as well. Historically, low inflation has had a strong inverse correlation with valuations (low inflation drives high multiples, and high inflation drives low multiples). Deflation, on the other hand, is generally bad for stocks because it signifies a loss in pricing power for companies. Economic strength of market and peers - Company stocks tend to track with the market and with their sector or industry peers. Some prominent investment firms argue that the combination of overall market and sector movements--as opposed to a company's individual performance--determines a majority of a stock's movement. (There has been research cited that suggests the economic/market factors account for 90%!) For example, a suddenly negative outlook for one retail stock often hurts other retail stocks as "guilt by association" drags down demand for the whole sector. Substitutes - Companies compete for investment dollars with other asset classes on a global stage. These include corporate bonds, government bonds, commodities, real estate, and foreign equities. The relation between demand for U.S. equities and their substitutes is hard to figure, but it plays an important role. Incidental transactions - Incidental transactions are purchases or sales of a stock that are motivated by something other than belief in the intrinsic value of the stock. These transactions include executive insider transactions, which are often pre-scheduled or driven by portfolio objectives. Another example is an institution buying or shorting a stock to hedge some other investment. Although these transactions may not represent official "votes cast" for or against the stock, they do impact supply and demand and therefore can move the price.
these two dynamics: 1) middle-aged investors are peak earners who tend to invest in the stock market, while 2) older investors tend to pull out of the market in order to meet the demands of retirement. The hypothesis is that the greater the proportion of middle-aged investors among the investing population, the greater the demand for equities and the higher the valuation multiples.
Trends - Often a stock simply moves according to a short-term trend. On the one hand, a stock that is moving up can gather momentum, as "success breeds success" and popularity buoys the stock higher. On the other hand, a stock sometimes behaves the opposite way in a trend and does what is called "reverting to the mean." Unfortunately, because trends cut both ways and are more obvious in hindsight, knowing that stocks are "trendy" does not help us predict the future. (Note: trends could also be classified under market sentiment.)
Liquidity - Liquidity is an important and sometimes under-appreciated factor. It refers to how much investor interest and attention a specific stock has. Wal-Mart's stock is highly liquid and therefore highly responsive to material news; the average small-cap company is less so. Trading volume is one proxy for liquidity. But it is also a function of corporate communications (that is, the degree to which the company is getting attention from the investor community). Large-cap stocks have high liquidity: they are well followed and heavily transacted. Many small-cap stocks suffer from an almost permanent "liquidity discount" because they simply are not on investors' radar screens.
Market Sentiment
Market sentiment refers to the psychology of market participants, individually and collectively. This is perhaps the most vexing category because we know it matters critically, but we are only beginning to understand it. Market sentiment is often subjective, biased, and obstinate. For example, you can make a solid judgment about a stock's future growth prospects, and the future may even confirm your projections, but in the meantime the market may myopically dwell on a single piece of news that keeps the stock artificially high or low. And you can sometimes wait a long time in the hopes that other investors will notice the fundamentals.
Market sentiment is being explored by the relatively new field of behavioral finance. It starts with the assumption that markets are apparently not efficient much of the time, and this inefficiency can be explained by psychology and other social sciences. The idea of applying social science to finance was fully legitimized when Daniel Kahneman, a psychologist, won the 2002 Nobel Prize in Economics. (He was the first psychologist to do so.) Many of the ideas in behavioral finance confirm observable suspicions: that investors tend to overemphasize data that come easily to mind; that many investors react with greater pain to losses than with pleasure to equivalent gains; and that investors tend to persist in a mistake.
Some investors claim to be able to capitalize on the theory of behavioral finance. For the majority, however, the field is new enough to serve as the "catch-all" category: everything we cannot explain is deposited into this inexplicable category.
Summary If one could work out a formula to give you a concrete answer on a stock, the markets wouldnt exist and money wouldnt change hands. Bottomline is recognition and understanding comes via experience and after years of trading. Beyond the figures and the analysis one has to trust one s gut, and take calculated risks. That in my opinion is the only way to understand the share pr movements.
lower p/e ratio coupled with high book value is very good for LONG term investments. Whereas if the scrip is a FANCIED scrip, even with high p/e, it may quote more. those scrips may be good for short term. hence, companies with low p/e ratio which are not fancied may take a long time to appreciate. but they are worth investing for long term
The Little Book That Beats the Market - Joel Greenblatt
Contrary to efficient-market naysayers, this engaging investment primer contends that ordinary stock-market investors can indeed get better-than-market returns over the long haul. Greenblatt (You Can Be a Stock Market Genius), a Columbia Business School adjunct professor, touts a "value-oriented" approach that looks for bargain stocks whose share price is cheap relative to the company's profitability. His version is a "magic formula" that ranks stocks on the basis of two variablesthe earnings yield and the business's return on capital. His Web site, magicformulainvesting.com, virtually automates the procedure for novices. Greenblatt offers lots of statistical proof of the formula's success, but emphasizes the importance of faith in seeing the investor through inevitable short-term downturns: "It will be your belief in the overwhelming logic of the magic formula that will make the formula work for you in the long run." He conveys his ideas through a lucid if rudimentary and rather corny explanation of basic investment concepts about risk, return, interest and business valuation. Although the fabulous returns he touts seem too good to be true, Greenblatt's formula is a reasonable variant of mainstream value-investing methods. Investors seeking a little more hands-on excitement than the average mutual fund offers won't go too far wrong following his advice. (Jan.)
Hallo,
I accept the importance of TA in trading, but Funda is Funda, cannot be ignored.
When mkt goes up up & up i.e. because of Fii,s Dealings also & same thing in case of Downnnn
So i think FII net purchse & sale trend should also be considered.
I salute to all my investor friends, and i wonder is you know something about CANSLIM strategy by William O'Neil and his book "How to make money in stocks" if you got a copy of that book in a pdf format. I really appreciate
PEG is the ratio of the Price Earnings Ratio to the expected Growth of the companies earnings per share.
PEG < 1 is a great Buy
A very high PEG means the stock is overvalued.
A PEG=1 implies fair valuation
Try 'Investment Valuation' and 'Damodaran on Valuation' by Aswath Damodaran. Here is a link of the second edition of 'Investment
It's an unfortunate fact that few investors can consistently beat the market. That's because it often takes one or more of the following rare traits...
1)The vision to identify breakthrough products, leaders, and brands
2)The knowledge to spot an undervalued gem in a sea of glass
3)The courage to buy and hold when others are running scared
Occasionally, you'll come across an investor with one of these valuable characteristics. And it's likely that person does quite well. But almost no one I know of can offer all three. That would take two very different possibly even fiercely competitive approaches...
4) The courage to not get depressed when everyone around him is making money and he is not (the investor is not envious).
What underlies every chart, every quote? - A COMPANY. Buy into that company my friend, where you find some value, not just some figures & pictures.
Warren Buffet doesn't ever needs charts he buy & holds onto a stock as long as he finds value in it. (And finding value is not bereft of arithmetic but it's a different kind of arithmetic
Try www.indiaearnings.com. Registration required
The best things in life are said to be free and the same holds true for cash flow! Investors love companies that produce plenty of free cash flow (FCF). It signals a company's ability to repay debt, pay dividends, buy back stock and facilitate the growth of business all important undertakings from an investor's point of view. In the past we have given our readers a perspective on valuation parameters like price to earnings (P/E) and price to book value (P/BV). While both these valuation parameters reflect the present earning capabilities, they do not signal the future prospects.
How and what of FCF
The formula for calculating Free Cash Flow (FCF) is as:
Net Profit + Depreciation Capital expenditure Changes in working capital Dividend
FCF takes into account not only the earnings of the company but also the past (depreciation) and present capital expenditures, capital inflows and investment in working capital. Growing free cash flows are frequently a prelude to increased earnings. Companies that experience surging FCF due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distribution (from subsidiaries) or debt elimination can reward investors in the future. Better free cash flows are therefore a reason for the investment community to cherish. On the other hand, an insufficient FCF for earnings growth can force a company to boost its debt levels. Even worse, a company without enough FCF may not have the liquidity to stay in business
From a companys point
better FCF definitely indicates better efficiency on the part of the company. But what is pertinent for investors to note is that simply assessing the FCF on the basis of its absolute value is not prudent. It is imperative to also assess as to what components have contributed to the same.
Let us take a hypothetical example of two companies, A and B, both of which have garnered the same FCF for the current financial year.
Estimated free cash flow
(Rs) Company A Company B
Net profit 75 120
Add: depreciation / amortisation 20 5
Less: Capital expenditure 5 15
Add/ (Less): Decrease /(Increase)in wkg capital 10 (10)
Less: Dividend 20 20
Free cash flow 80 80
Prima facie although appearing similar, if you delve a little deeper there is a stark difference in their performances. While company A, despite having lower earnings has benefited by adding back depreciation and decrease in working capital, company B has invested in capex and working capital. This indicates that while company B is investing for future growth, company A is not sufficiently geared up for the impending challenges. This also means that investors in company B can expect rewards in
PRINT THIS E-MAIL THIS FEEDBACK
OUTLOOK ARENA >> VIEWS ON NEWS >> MAY 13, 2005
Free cash flow: Is it free after all?
MYSTOCKS | FREE NEWSLETTER
The best things in life are said to be free and the same holds true for cash flow! Investors love companies that produce plenty of free cash flow (FCF). It signals a company's ability to repay debt, pay dividends, buy back stock and facilitate the growth of business all important undertakings from an investor's point of view. In the past we have given our readers a perspective on valuation parameters like price to earnings (P/E) and price to book value (P/BV). While both these valuation parameters reflect the present earning capabilities, they do not signal the future prospects.
How and what of FCF
The formula for calculating Free Cash Flow (FCF) is as:
Net Profit + Depreciation Capital expenditure Changes in working capital Dividend
FCF takes into account not only the earnings of the company but also the past (depreciation) and present capital expenditures, capital inflows and investment in working capital. Growing free cash flows are frequently a prelude to increased earnings. Companies that experience surging FCF due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distribution (from subsidiaries) or debt elimination can reward investors in the future. Better free cash flows are therefore a reason for the investment community to cherish. On the other hand, an insufficient FCF for earnings growth can force a company to boost its debt levels. Even worse, a company without enough FCF may not have the liquidity to stay in business
From a companys point of view
A better FCF definitely indicates better efficiency on the part of the company. But what is pertinent for investors to note is that simply assessing the FCF on the basis of its absolute value is not prudent. It is imperative to also assess as to what components have contributed to the same.
Let us take a hypothetical example of two companies, A and B, both of which have garnered the same FCF for the current financial year.
Estimated free cash flow
(Rs) Company A Company B
Net profit 75 120
Add: depreciation / amortisation 20 5
Less: Capital expenditure 5 15
Add/ (Less): Decrease /(Increase)in wkg capital 10 (10)
Less: Dividend 20 20
Free cash flow 80 80
Prima facie although appearing similar, if you delve a little deeper there is a stark difference in their performances. While company A, despite having lower earnings has benefited by adding back depreciation and decrease in working capital, company B has invested in capex and working capital. This indicates that while company B is investing for future growth, company A is not sufficiently geared up for the impending challenges. This also means that investors in company B can expect rewards in future while those in company A should sit up and take notice of what is ailing it.
FY06E Price FCF P/FCF
SBI 612 203.9 3.0
ONGC 874 131.3 6.7
Tisco 354 26.2 13.5
BHEL 831 31.6 26.3
Infosys 2039 51 40.0
Ranbaxy 965 19.6 49.2
HLL 132 1.9 69.5
From a sectors point of view
As explained earlier, cash flows are dependant on the capital expenditure and working capital liabilities borne by the company. This however, differs as per the dynamics of the sector in which the company is operating and should be seen in that light. While sectors like banking require minimum expenditure on capex (as a % of their turnover) those in pharma, engineering, FMCG or commodity sectors require to invest a substantial amount in R&D and capacity expansions. Thus, you would find SBI trading at a very attractive price to free cash flow valuation of 3 times, while an equally competitive Infosys is trading at 40 times (due to lower cash flows).
To conclude...
FCF is not only a mirror image of the present but also a sneak preview into the future. The implications of the components of cash flow may not be explained in the annual reports, but is left to the investors prudence to diligently scrutinize the same and try to read between the lines. The legendry investor Benjamin Graham once said, The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than worth his purchase
What Is Free Cash Flow?
By establishing how much cash a company has after paying its bills for ongoing activities and growth, FCF is a measure that aims to cut through the arbitrariness and "guesstimations" involved in reported earnings. Regardless of whether a cash outlay is counted as an expense in the calculation of income or turned into an asset on the balance sheet, free cash flow tracks the money.
To calculate FCF, make a beeline for the company's cash flow statement and balance sheet. There you will find the item cash flow from operations (also referred to as "operating cash"). From this number subtract estimated capital expenditure required for current operations:
Cash Flow From Operations (Operating Cash) - Capital Expenditure ---------------------------= Free Cash Flow
To do it another way, grab the income statement and balance sheet. Start with net income and add back charges for depreciation and amortization. Make an additional adjustment for changes in working capital, which is done by subtracting current liabilities from current assets. Then subtract capital expenditure, or spending on plants and equipment
By establishing how much cash a company has after paying its bills for ongoing activities and growth, FCF is a measure that aims to cut through the arbitrariness and "guesstimations" involved in reported earnings. Regardless of whether a cash outlay is counted as an expense in the calculation of income or turned into an asset on the balance sheet, free cash flow tracks the money.
To calculate FCF, make a beeline for the company's cash flow statement and balance sheet. There you will find the item cash flow from operations (also referred to as "operating cash"). From this number subtract estimated capital expenditure required for current operations:
Cash Flow From Operations (Operating Cash) - Capital Expenditure ---------------------------= Free Cash Flow
To do it another way, grab the income statement and balance sheet. Start with net income and add back charges for depreciation and amortization. Make an additional adjustment for changes in working capital, which is done by subtracting current liabilities from current assets. Then subtract capital expenditure, or spending on plants and equipment
Net income + Depreciation/Amortization - Change in Working Capital - Capital Expenditure ---------------------------- = Free Cash Flow
It might seem odd to add back depreciation/amortization since it accounts for capital spending. The reasoning behind the adjustment, however, is that free cash flow is meant to measure money being spent right now, not transactions that happened in the past. This makes FCF a useful instrument for identifying growing companies with high up-front costs, which may eat into earnings now but have the potential to pay off later.
What Does Free Cash Flow Indicate?
Growing free cash flows are frequently a prelude to increased earnings. Companies that experience surging FCF - due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distributions or debt elimination - can reward investors tomorrow. That is why many in the investment community cherish FCF as a measure of value. When a firm's share price is low and free cash flow is on the rise, the odds are good that earnings and share value will soon be on the up.
By contrast, shrinking FCF signals trouble ahead. In the absence of decent free cash flow, companies are unable to sustain earnings growth. An insufficient FCF for earnings growth can force a company to boost its debt levels. Even worse, a company without enough FCF may not have the liquidity to stay in business.
Free Cash Flow: Free, But Not Always EasySeptember 17, 2003 | By Ben McClure, Contributor - Investopedia Advisor Email this Article Print this Article Comments Add to del.icio.us
Other RSS Readers
The best things in life are free, and the same holds true for cash flow. Smart investors love companies that produce plenty of free cash flow (FCF). It signals a company's ability to pay debt, pay dividends, buy back stock and facilitate the growth of business - all important undertakings from an investor's perspective. However, while free cash flow is a great gauge of corporate health, it does have its limits and is not immune to accounting trickery. What Is Free Cash Flow? By establishing how much cash a company has after paying its bills for ongoing activities and growth, FCF is a measure that aims to cut through the arbitrariness and "guesstimations" involved in reported earnings. Regardless of whether a cash outlay is counted as an expense in the calculation of income or turned into an asset on the balance sheet, free cash flow tracks the money. To calculate FCF, make a beeline for the company's cash flow statement and balance sheet. There you will find the item cash flow from operations (also referred to as "operating cash"). From this number subtract estimated capital expenditure required for current operations: Cash Flow From Operations (Operating Cash) - Capital Expenditure ---------------------------= Free Cash Flow
To do it another way, grab the income statement and balance sheet. Start with net income and add back charges for depreciation and amortization. Make an additional adjustment for changes in working capital, which is done by subtracting current liabilities from current assets. Then subtract capital expenditure, or spending on plants and equipment: Net income + Depreciation/Amortization - Change in Working Capital - Capital Expenditure ---------------------------- = Free Cash Flow
It might seem odd to add back depreciation/amortization since it accounts for capital spending. The reasoning behind the adjustment, however, is that free cash flow is meant to measure money being spent right now, not transactions that happened in the past. This makes FCF a useful instrument for identifying growing companies with high up-front costs, which may eat into earnings now but have the potential to pay off later. What Does Free Cash Flow Indicate? Growing free cash flows are frequently a prelude to increased earnings. Companies that experience surging FCF - due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distributions or debt elimination - can reward investors tomorrow. That is why many in the investment community cherish FCF as a measure of value. When a firm's share price is low and free cash flow is on the rise, the odds are good that earnings and share value will soon be on the up. By contrast, shrinking FCF signals trouble ahead. In the absence of decent free cash flow, companies are unable to sustain earnings growth. An insufficient FCF for earnings growth can force a company to boost its debt levels. Even worse, a company without enough FCF may not have the liquidity to stay in business. Is Free Cash Flow Foolproof? Although it provides a wealth of valuable information that investors really appreciate, FCF is not infallible. Crafty companies still have leeway when it comes to accounting sleight of hand. Without a regulatory standard for determining FCF, investors often disagree on exactly which items should and should not be treated as capital expenditures. Investors must therefore keep an eye on companies with high levels of FCF to see if these companies are under-reporting capital expenditure and R&D. Companies can also temporarily boost FCF by stretching out their payments, tightening payment collection policies and depleting inventories. These activities diminish current liabilities and changes to working capital. But the impacts are likely to be temporary. The Trick of Hiding Receivables Let's look at yet another example of FCF tomfoolery, which involves specious calculations of the current accounts receivable. When a company reports revenue, it records an account receivable, which represents cash that is yet to be received. The revenues then increase net income and cash from operations, but that increase is typically offset by an increase in current accounts receivable, which are then subtracted from cash from operations. When companies record their revenues as such, the net impact on cash from operations and free cash flow should be zero since no cash has been received.
Secondly, Cash Flow Statement can give an idea about cash-generation capability of the business. Thus, it's helpful for those who are interested in knowing the liquidity position of the organization like creditors or those shareholders who are interested in Dividends. However, it's not really a tool of detecting fraud. We must remember that both Enron & Worldcom used to provide Cash Flow Statement.
The gap between Cash Flow and Earnings has to be seen in light with that during the previous financial years as well as the average for the industry. Besides, year end window-dressing will certainly not generate any cash flow for the year but current year's Cash Flow will certainly include cash generated as a result of window dressing which took place at the end of the previous year.
A wide gap between cash flow and earnings may indicate that all is not well for the company but one can't jump to the conclusion only on the basis of this gap that the accounts have been manipulated.
try on icicidirect.com in research "multex global"
Most traders ignore reward/risk ratios, hoping that luck will save them when things start to go bad.
This is probably the main reason so many of them are destined to fail. It's really dumb when you think about it, because reward/risk is the easiest way to get a definable edge on the market house.
The reward/risk equation builds a safety net around your open positions. It's designed to tell you how much can be won, or lost, on each trade you take. The secondary purpose is to remove emotion so you can focus squarely on the cold, hard numbers.
Let's look at 15 ways that reward/risk will improve your trading performance.
1. Every setup carries a directional probability that reflects a specific pattern. Always execute positions in the highest-odds direction. Exit your trades when a price fails to respond according to your expectations.
2. Every setup has a price level that violates the pattern. Only take trades where price needs to move a short distance to hit this "risk target." Look the other way and find the "reward target" at the next support or resistance level. Trade positions with the highest reward target to risk target ratios.
3. Markets move in trend and countertrend waves. Many traders panic during countertrends and exit good positions out of fear. After every trend in your favor, decide how much you're willing to give back when things turn against you.
4. What you don't see will hurt you. Back up and look for past highs and lows your trade must pass through to get to the reward target. Each price level will present an obstacle that must be overcome.
5. Time impacts reward/risk as efficiently as price. Choose a holding period based on the distance from your entry to the reward target. Then use price and time for stop-loss management. Also use time to exit trades even when price stops haven't been hit.
6. Forgo marginal positions and wait for the best opportunities. Prepare to experience long periods of boredom between frantic surges of concentration. Expect to stand aside, wait and watch when the markets have nothing to offer.
7. Good setups come in various shades of gray. Analyze conflicting information and jump in when enough ducks line up in a row. Often the best thing to do is calculate how much you'll lose if you're wrong, and then take the trade.
8. Careful stock selection controls risk better than any stop-loss system. Realize that standing aside requires as much deliberation as an entry or an exit, and must be considered on every setup.
9. Every trader has a different risk tolerance. Follow your natural tendencies rather than chasing the crowd. If you can't sleep at night, you're trading over your head and need to cut your risk. Lot of talk the past few months regarding these three....especially on stagflation.Few interesting reads.........
http://www.investopedia.com/universi...inflation1.asp
http://www.investopedia.com/terms/d/deflation.asp
http://www.investopedia.com/ask/answers/202.asp
http://www.investopedia.com/terms/s/stagflation.asp
http://www.indiadaily.com/editorial/2119.asp
http://www.safehaven.com/article-2829.htm
10. Never enter a position without knowing the exit. Trading is never a buy-and-hold exercise. Define your exit price in advance, and then stick to it when the stock gets there.
11. Information doesn't equal profit. Charts evolve slowly from one setup to the next. In between, they emit noise in which elements of risk and reward conflict with each other.
12. Don't be fooled by beginner's luck. Trading longevity requires strict self-discipline. It's easy to make money for short periods of time. The markets will take back every penny until you develop a sound risk-management plan.
13. Enter positions at low risk and exit them at high risk. This often parallels to buying at support and selling at resistance, but it can also be used to trade momentum with safety and precision.
14. Look to exit in wild times in order to increase your reward. Wait for price acceleration and feed your position into the hungry hands of other traders just as the price pushes into a high-risk zone.
15. Manage risk on both sides of the trade. Focus on optimizing entry and exit points and specialize in single, direct price waves. Remember that the execution of low-risk entries into bad positions allows more flexibility than high-risk entries into good positions.
Do some research on the basis of EPS, PE and their competitors in the sector also company future plans and past growth. You will get fair idea about your query.
...........................................