Factors to consider in selecting public offers (1)
November 1st, 2007 Ugonna Maduagufor || ugonna@stockmarketnigeria.com
(by Ugonna Maduagufor)
Always assume that the market is inefficient information wise no matter how efficient it is painted to be, thats the position of an active stock trader.
An efficient capital market is such where the true financial position of listed companies are reflected in their respective share prices using all available information. The efficient market hypothesis concerning the degree of efficiency to which stock markets does so is classified into three forms: weak form, semi-strong form and strong form market efficiency.
At least a number of factors should be considered before buying into any stock especially a public offer in the sense that company directors are likely to do a lot of creative accounting in other to induce investors into accepting just any offer price. This is why a public offer is statutorily made with a prospectus to guide the public. Some of the major factors that should be considered includes: a) the earnings profile of the company, b) the capital stucture of the company, c) amount and nature of indebtedness, d) management profile, e) ownership structure, f) product mix and other marketing factors, g) valuation of intangible assets. Lets look at each of these factors :
a) The earning profile of the company. investors generaly analyse the earning profile of companies using: i) EPS, ii)earnings yield, iii)P/E ratio, iv)dividend per share, v)dividend yield,etc.
i) An upward trend in the EPS ofcourse indicates a growth in value of shares, subject to inflation. However, It is handicapped in comparing different companies: 1) it is based on historical data which may not hold in the future; 2) it is subject to individual company accounting policy; 3) it can not be easily used to compare companies with different nominal share values,etc.
ii) comparing securites by their earnings yield is superior to using EPS to the extent that it imputs the public investors opinion(valuation) by capitalising the EPS with market value of shares and it is expressed in percentages (not absolute figures as in EPS).
Computation,
Earnings yield =EPS/market value
where mv = market value or public investors valuation of unit share.
( to be continued)
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