This is a very brief introduction to the very
vast subject of fundamental analysis. Subscribers of i Capital®
are encouraged to undertake more research of their own to fully
benefit from this important topic. To understand and make productive
use of fundamental analysis, familiarity with accountancy and economics
are essential. However, one need not be an accounting or economics
expert for this purpose.
From a shorter - term perspective, one could argue that fundamental
analysis does not apply to the Kuala Lumpur Stock Exchange ( KLSE
). From a longer - term perspective, however, it is very difficult
to invest successfully even on the KLSE without incorporating fundamental
analysis into one's methodology. While the general perception is
that the KLSE is still an inefficient market where rumours, tips,
poor corporate governance, etc. rule, the smart investor would realise
that applying sound fundamental analysis in such a stock market
can be rewarding. But just like any other investment methods, fundamental
analysis has its strength and weakness.
A. Earnings Per Share (EPS)
The Formula for calculating net EPS is:
Net Attributable Profit divided by Number of Shares Outstanding
EPS is generally used as an indicator of the performance of a company
over a long period of time. For example, while a company's earnings
may be rising over a period of time, its EPS may not be. There are
various ways in calculating a company's EPS, depending on what the
objective of the investor or analyst is. Most use net attributable
earnings, that is, earnings after tax and minority interests.
EPS can also be based on historical or prospective earnings. Projected
EPS is important because it can significantly influence the company's
share price. A company's EPS can also be calculated on a diluted
or non-diluted basis. Where a company has warrants outstanding,
it is common practice to calculate the EPS assuming that all the
warrants are exercised. The number of shares outstanding may also
be affected by rights and bonus issues. In such cases, the number
of shares outstanding could be an average figure.
B. Price - Earnings Ratio (PE ratio)
PE Ratio is a useful tool for valuing companies,
that is, it establishes a quantitative relationship between the
share price and earnings of a company. It shows how much one is
paying relative to its earnings. PE ratio can be used for the
same company over a period of time or it can be used to compare
2 or more companies at the same period of time.
The formula for PE ratio is:
Current market price divided by earnings per share.
There are generally 2 types of PE ratio calculated:
a) Historical PE ratio is based on past EPS.
b)Prospective PE ratio is based on future or forecasted EPS.
For example, when we say that the 2001 PROSPECTIVE PE ratio for
company XYZ is 17 times, this refers to the present market price
of Company XYZ but based on its forecasted EPS for 2001. If we use
the 1999 EPS, then we are referring to the HISTORICAL PE ratio.
C. Dividend Yield
The formula for Dividend Yieldis:
Dividend per share divided by Market price per share
It is always expressed in percentage terms. Dividend yield is often
used to compare with the interest derived from fixed deposits or
other investment alternatives. This will help us evaluate which
investment alternative gives a better return. In making such comparisons,
one needs to decide whether it is more relevant to use net or gross
dividends. Just like calculating a PE ratio, the dividend per share
can be on a historical or prospective basis.