Evaluate Stock by PB ratio

In previous article, we had discussed in PE ratio. In this chapter, we would like to discuss another important indication - PB ratio.

PB ratio stand for Price / Book value ratio. Book Value meaning the Net Asset Value for the stock.

In the financial report or some other sources, you can get the NAV for the share. The NAV is determine by Total Asset Value / Total share.

Eg.
Airasia
Total Asset Value is RM 2,676,586,000
Total Share Issued is 2,759,368,000
NAV or Book Value per share is RM 2,676,586,000 / 2,759,368,000 = RM 0.97 per share.
Current Price is RM 1.17
PB ratio is 1.2; meaning the market price is higher then the NAV for 20%

Please dun mistaken that PB ratio >1 meaning the share is over value. This is just one of the analysing factor. Because a lot of business does not own Asset but still valued. Especially for Nasdaq company (IT company). Normally for this kind of company they own Intellectual Properties (IP) which is not count as Asset in this case. So normally their PB ratio is very high.

So when you want to compare on PB ratio, you must compare with the same nature of business (as mention in PE Ratio Analyse).

PB ratio create a "Safe Impression". If the PB ratio is near to 1 or less then 1; then if anything happen, this company still can sell of its Asset and create that value to the share holder.

In most case, the Asset value is created by Product Stock of the company, building, machine, etc.
When you are using PB ratio as analysis, please also consider the nature of the business. If this business collapes, will the "Asset" decrease in value?

Note: PB ratio cannot be use as the only analyse index. Some NAV might over valued by the company to show it is more interesting.

Evaluate Stock by PE Ratio

What is PE Ratio

PE Ratio stand for Price / Earning Ratio

Eg. Airasia current price is RM 1.21; on last financial year, they report a RM 0.224 as the Earning Per Share (EPS)

PE ratio for current price will be 1.21 / 0.224 = 5.4

How can we use PE ratio to evaluate the company?

For all company that making profit, they have the PE ratio. (Again it is come back to your strategy - long term or short term investment.)

Another way of looking at PE ratio is the Return of Investment (ROI). Let say Airasia make a profit of 22.4 sen per year and the current price is RM 1.20. Your ROI on investing this share in this price is
0.20 / 1.2 = 18.67% p.a

Of course, PE ratio is based on last year financial performance. Most of the company will annouce Financial Statement every Quarter. You can based on the latest financial status and calculate on the PE ratio.  You can also look for past few years.

For Eg.

Glomac

The EPS for this share is very consistent. Based on current Financial Report; EPS for 3rd Q in year 09/10 is 9.86sens From calculation, we expect EPS to be 13.15sens.

Current Price is RM 1.25; that means the PE ratio is 9.5 (Expected)

If we based on last year performance; the PE ratio is 10.9 (As publish)

And your can calculate your ROI based on the current price. You will decide whether the ROI is good enough or not.

Of course, we have to evaluate the stock based on their business nature. It may not wise for us to compare PE ratio for Glomac and Public Bank. The movement of the price is different based on the nature of the business.

It will be more proper for us to evaluate Public Bank (11) vs Maybank (70) vs CIMB (17). or Glomac (10) vs UEM land (40) vs Gamuda (30).

This shows you which stock is more worth to buy.

Why not just based on current Price?

For stock, current price might not mean the real value.

Maybank current price RM 7.50 ; PE ratio is 70 ; ROI = 1.43%

Public Bank current price RM 11.7 ; PE ratio is 11 ; ROI = 9.09%

Can you tell me which stock is more worth to buy? Maybank or Public bank is over valued?

HISTORY

Rapco Holding in 1997 price went up to RM 140.50 per share. The highest PE ratio goes up to 370!!!

If you had know about PE ratio, will u pick up this stock? which your ROI is less then 1%

In 2001, the  price is Rm 7.10; Now Rapco already delisted from second board.

PE ratio is a very important index; it will be useful even your strategy is for short term investment. You can evaluate the risk taken if you want to invest this stock as a short term investment.

Note:

Besides PE ratio, PB ratio is also a very important index. We will share about PB ratio in next article.

Annual Report Highlights

Every public listed company need to send in their Annual Report to all share holders and Bursa Saham Malaysia.

Annual Report content a lot information about the company. Normal Annual Report having more then 100 pages. Here we will share on reading the highlights in Annual Report.

1. Director Profile
You are going to invest your money into this company. You will need to know who is running on your money.

2. Company Structure
You will know what is this company about. How they doing their business, their product / service.

3. 3 to 5 years Financial Highlights
This represent the history of the company. You will know is this company consistantly making profit or just making profit by their luck.

4. Chairman StatementThis tell you on the future development in the company. Imagine the Chairman of the company is presenting his company to you. You are the investor of the company, of course you need to know what is he going to do.

5. Financial Report - Director ReportYou will know who is holding the share in this company. Imagine if you hold a share where their directors is just holding a very small portion of share in the company, will you invest in this company? This can show the confident level of the Directors in the company.
You also will know is there any conflic of interest; is any director having another company that making business with this company.

5. Income Statement
This is a VERY VERY important statement that you MUST READ.
This tell you how the company make / lost money. Look into the revenue, cost, number of shares, earning per share.
There is a NOTE column. This Note Column will lead you to the details on the number stated in this portion.
If you feel weird on how this company making / losing money, you can refer to the note, such as Revenue, Cost of Sale.

6. Balance Sheet
You can know what is the Asset that this company own (please refer to the note and identify is that the true value).
Here you also can know the loan that this company is taking. Long term loan and short term loan.

Lastly, we would like to share a common statement:

NOT all Annual Report are what they appear. Annual Report is one of the PR tools. Company might make some not true statement. BUT this is not right in the LAW.
You can refer to the audit company. Perhaps the reputation of the Audit company can helps you to increase the confident level.

You can get all the Annual Report in KLSE website:
http://www.klse.com.my/website/bm/listed_companies/company_announcements/annual_reports/index.jsp

Note: You are an investor. You will invest your money in this company. It is totally worth for you to read through the Annual Report before decide to invest in the company.