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Keep an eye on
analysts’ forecasts. Whether right or wrong,
they can move markets.
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The City rewards
companies that achieve a readily rising earn¬ings
per share.
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The P/E ratio is
how the market rates a company. It shows how many
years it will take the company, at the present rate
of earnings, to earn its market value.
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The PEG ratio combines
an assessment of earnings growth with the P/E ratio
and is used to value small growth companies. The
lower it is, the better.
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Use net asset value
per share to value property companies, investment
trusts or composite insurers.
-
Depreciation is
the gradual reduction in value of a fixed asset.
Companies should use a consistent method.
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Growth companies
can often make more money for investors by reinvesting
earnings than paying a dividend.
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If a company that
regularly pays a dividend cuts it, this is a danger
sign.
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A company needs
a current ratio (current assets less current liabilities)
of at least 2 to demonstrate adequate liquidity.
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EV/EBITDA may be
used to value high-tech/telecoms com¬panies
with high interest payments.
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Dividend cover
is earnings per share divided by dividend per share
and it should be at least 1.
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If a company’s
gearing (borrowing) exceeds 50 per cent, it is time
to ask questions.
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If a company has
a rising return on capital employed, it is using
its assets efficiently.
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The price/sales
ratio is commonly used to value technology companies
without earnings.
-
Analysts favour
discounted cash flow analysis to value com¬panies.
It is best calculated on several discount rates.
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Invest in market-leading
companies with strong, experienced management, and
growth potential as well as value.
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A cut in interest
rates benefits shares, and a rise has the opposite
effect.
-
The Consumer Price
Index is used by the UK government to set its inflation
target.
-
Gross Domestic Product
measures national income.
-
Money supply is
believed by monetarists to control inflation.
-
Falling unemployment
benefits consumer spending but may lead to a rise
in interest rates to combat a perceived inflation
threat.
-
If sterling is strong,
imported commodities are cheaper, which helps to
keep inflation down
