Learning fundamental analysis...

[Kez180]

Not so much with banks, but with things like retailers this can be very useful:

ROE = Trading Margin * Turnover * Leverage

Net Profit/Equity = Net Profit/Sales * Sales/Assets * Assets/Equity

If 2 company's have the same ROE, but one has massive leverage and the other has a high margin, this will clearly differentiate them...

The other posts are full of useful hints as well!

 

[Semillon]

Dhukka - thank you for the considered response.

Don't confuse cash eps with cashflow per share, two different things.

I had definitely made this mistake.

The Price Earnings ratio (PE) is NOT a Valuation metric, I can't stress this enough. If you believe that the value of a stock and the price of a stock are too different things, then how can you use price in the calculation of value? A stock with a P/E of 30x can be cheaper than a stock with a P/E of 10x. All a P/E tells you is what investors are willing to pay for a stock at any point in time

Do you feel it is useful for comparing similar companies, eg BHP & RIO or for comparing the current figures with historical ones?

Lastly I would encourage you to pore over annual reports (with a very skeptical eye) to get your data rather than rely on e-trade. It may take you longer but it gives you valuable experience in reading financial statements.

Part of the reason I started with the data on e-trade was because I was led to believe that different companies would use different definitions for calculations, EPS being an obvious example. My hope was that the data source for e-trade has been compiled to allow us to compare apples with apples.

Furthermore most of the terminology used in annual reports was foreign to me until this week, hopefully now I will be able to make sense of the relevant sections and compile my own data as you suggest.

 

[Krusty the Klown]

Just a question for you fundamental gurus, how do you screen/select companies to look through the balance sheets of?

The are 1900 odd companies listed on the asx, it would take quit a while to go through and find all of these statistics.

Cheers
Brad

One way is to look in the share tables of the Financial Review. They list major ratios/indicators for each listed company. You can use this to screen, and then dig deeper if something appeals. They can be downloaded as an excel file.

 

[Krusty the Klown]

Which other metrics do you find useful?

Another indicator to look for is Net Tangible Assets (NTA). It is the measure of cash left if the company was liquidated and all real assets sold off at market value, then all debts paid out.

For example if you bought a share for $1 and it has NTA of $1.20 and it went belly up next week. You would get your capital back + a 20% profit.

I like to use this as a starting point, it's a good safety measure. It does change over time and needs to be monitored.

In terms of banks you are studying, banks usually don't have a positive NTA as borrowing capital is a corner stone of their business, and they don't really have a lot of real assets, so it is more important in non-bank sectors.

 

[dhukka]

Do you feel it is useful for comparing similar companies, eg BHP & RIO or for comparing the current figures with historical ones?

What is the purpose of the comparison? If you are making the comparison to determine which one is better value I would say absolutely not.

Part of the reason I started with the data on e-trade was because I was led to believe that different companies would use different definitions for calculations, EPS being an obvious example. My hope was that the data source for e-trade has been compiled to allow us to compare apples with apples.

Furthermore most of the terminology used in annual reports was foreign to me until this week, hopefully now I will be able to make sense of the relevant sections and compile my own data as you suggest.

I don't want to be dogmatic about it. If you are confident that you understand the e-trade data and are comfortable with the methodology that e-trade uses then by all means use it. Comsec uses Huntley's data and they provide definitions of each term, Huntleys have been around for some time, I know people who have worked there and I am confident of the integrity of the data. However if I get interested enough in a company to analyze it, I'll go back to the financial statements themselves.

If you really want to analyze things up close you'll find yourself going to the source (financial statements) for more info because you just don't get the full picture with data providers, such as the notes to the accounts which can be particularly useful. Banks are peculiar beasts and there is lot of pertinent information that you just won't find on e-trade with respect to tier ratios and nonperforming loans - crucial components of analyzing bank stocks.