Demystifying the Annual Report (5)
July 22nd, 2008 Tunde Brown || tunde.brown@stockmarketnigeria.com
Some companies present strong fundamentals, but relative to similar companies in the same sub-sector, have a low P/E Ratio. This indicates a green light in the medium and long term. However, there is hardly any viability index that perfectly portends a positive or negative present and/or future for a company. So, though a high P/E ratio may mean high expectation from investors, this trend could spell trouble. Also, that a stock is cheap (low P/E ratio) does not mean an investor should buy it. If a company’s share price has fallen, some sort of intelligence gathering should be done to ascertain what the share price is reacting to. By and large, the P/E ratio is not usually featured in the annual report of companies, but against the backdrop of the Earning per Share, the ratio could be of immense help.
The quality of a company’s profit as defined by the Net Profit Margin could also be an eye opener. The Net profit margin (or profit margin) is defined as the ratio of net profit acquired over a fiscal period from the company’s operating activities, to the total revenues made during the same period. By simply dividing the net income by the gross sales, the part of each naira sales that results in profit is determined. If it’s flat or trending upward, your earnings per share figure is more reliable. If it’s trending downward while earnings are up, something MIGHT be fishy.
The profit margin could also be applied across specific industries to sample a company’s cost control knack. One must however bear in mind the fact that the comparison should be made with like companies. The service sector is likely to have a higher profit margin as compared to the real sector, a trend that is due to a relatively higher overhead bill in the real sector, as compared to the service sector.
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