Friday, April 22, 2016

How to values stocks (based on profitability and growth) - excerpts from Thomas Howard

Return on Equity = ROE
Net profit margin = NPM
Total Asset turnover = TAT
Equity multiplier = EM

DuPont ratio analysis : ROE = NPM x TAT x EM


Look for Company's growth potential.  

How does a company grow?  - retains earnings for reinvestment in the company.  reinvests the retained earnings in assets, both physical and human, ultimately producing more revenues.  revenues to grow faster than shareholder equity and in turn earnings per share grows faster than revenues.

dividends per share if it exceeds earnings per share, growth is good.
dividends per share growing more slowly than earnings per share means that the company's ability to pay future dividends is improving, which is a positive thing.

Sustainable growth = ROE x retention rate

retention rate is the fraction of earnings retained.

Look for Dividend Growth

V=DPS / (R - G)

V = Current value of the stock
DPS = dividends per share expected to be paid over the next 12 months
R = required rate of return for this particula stock
G = expected constant growth in dividends

Look for Net profit margin

Graham and Dodd Earnings valuation - relationship between a company's growth rate and its price-earnings (P/E) is

P/E = 8.5 + 2G