The Way Forward

Dynamic Rules

• Keep an eye on analysts’ forecasts. Whether right or wrong, they can move markets.
• The City rewards companies that achieve a readily rising earn¬ings per share.
• 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.
• 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.
• 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.
• Growth companies can often make more money for investors by reinvesting earnings than paying a dividend.
• If a company that regularly pays a dividend cuts it, this is a danger sign.
• A company needs a current ratio (current assets less current liabilities) of at least 2 to demonstrate adequate liquidity.
• EV/EBITDA may be used to value high-tech/telecoms com¬panies with high interest payments.
• Dividend cover is earnings per share divided by dividend per share and it should be at least 1.
• If a company’s gearing (borrowing) exceeds 50 per cent, it is time to ask questions.
• If a company has a rising return on capital employed, it is using its assets efficiently.
• 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.
• Invest in market-leading companies with strong, experienced management, and growth potential as well as value.
• 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.