StockMarketAnalysis- Choosing the Right Share

To pick the right share, you should examine the company in the following areas:

• potential growth
• quality of management
• finanacial health
• nature of the business

POTENTIAL GROWTH

The factors that will affect the potential growth of a company are as follows:

• the country in which the company has investments and businesses.
• the nature of business the company is engaged in, which implies, i the new economy context, the level of technology it commands.
• how innovative the company is (most products are becoming commodities, hence profit opportunities arise more readily with more innovative companies).

QUALITY OF MANAGEMENT

The factors to look for in judging the quality of management are:

• past performance of the company under the management.
• qualification and prefessionalism of management.
• staff turnover rate.
• track record of management.

FINANCIAL HEALTH

the common figures to look for in assessing the financial health of a company are:

• historic net earnings per share (EPS).
• historic price earning ratio (PE ratio)
• net tangible asset per share (NTA).
• net profit after tax.
• net profit margin.
• intangibles such as innovation capabilities; too much emphasis on numbers alone is not advocated.

The ratios should be compared not only across time, but also among the different companies with the same industry. Comparison across time gives an evaluation of the performance of the company with respect to that of the previous years. Comparison across firms in the same industry helps to judge the competitiveness and performance of the company in the industry.

these figures can be obtained from the following sources:

• annual reports of the company (the US companies are the best).
• prospectus(if it is an IPO).
• Newspapers, e.g. The Business Times
• SGX publications
• Others, e.g. BusinessWeek

Annual Reports

The company's annual report is a good source of infomation. It tells you what's going on in the company at a particular time and what its prospects for the future are. When studying annual reports, note the following:

• start from the back of the auditors' report. do they qualify their report or are they satisfied?
• read the footnotes. is anything hidden in the small print?
• what does the chairmna say in his statement?
• examine the profit & loss accounts. look particualarly at turnvoer, expenses, pre-tax profits and earnings per share.
• look at the Balance sheet. is the company burdened by too much debt?
• look at the cashflow statement; this is very important. is the company maximising the use of its cash?
• compare annual reports.

A Quick Guide to Buying Shares

DO

• buy low and sell high
• monitor the share price of the company whose shares you want to buy.
• understand market sentiments.
• do your homework and find out basic information about the comapny.
• diversify your investments.
• view shares as medium to long-term investments.
• condsider transaction costs.

DON"T

• buy more than you can afford
• speculate and buy shares based on rumours.
• buy shares that have appreciated a great deal recently. share price can never just move upwards only.
• try to cut losses by buying shares at a lower price. the price may drop further and you will lose even more.