P&E

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Permalink Reply by jacquesk on January 28, 2009 at 10:18am

Tried wikipedia? http://en.wikipedia.org/wiki/PE_ratio

Just a personal point but as a rule of thumb I do not purchase shares in companies with a high P/E ratio.

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Permalink Reply by ff123 on January 28, 2009 at 11:12am

To easy - Jacquesk took your advice about reading books - one of them said not to touch anything with a PE of 20 or more - with all the capital raising going on it would be difficult for any company to achieve this at the moment however some like FMG have a negative PE - which according to Wikipedia means Companies with losses (negative earnings) or no profit have an undefined or negative PE - this is what is shown on some sites.

Haven't figured out if this is a good thing or a bad thing if everything else is equal - guess it doesn't apply with start up companies at all.

Beginning to understand that this is only one measure - will be a pain in the butt until I get my head around it all - or just give up and buy managed funds.

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Permalink Reply by Matthew Reader on January 29, 2009 at 12:57pm

There are a few different ratios that are important...this articles runs through a few:

Use these 5 ratios to unearth superior stocks

PEG seems to be one that everyone's leaning towards these days. I found this definition on Compareshares:

"The Price Earnings Growth (PEG) ratio is calculated by dividing the company’s price earnings (PE) ratio by the company’s earnings per share growth (EPSG). Hence, PEG = PE/EPSG.

A Price Earnings (PE) ratio of above the industry average suggests that a company may be fully valued at the current share price. In this instance, Lincoln considers the PEG ratio which compares a company’s price earnings ratio to the company’s earnings per share growth (EPSG).

A PEG ratio below 1 indicates that the company’s growth rate justifies its PE ratio. Where as a PEG ratio above 1 and a PE ratio above the Industry average indicates that the company is likely fully valued at its current price.

In our example above, TRS’ PE ratio of 17.06 is above the Retailing industry average of 9.27. However, the company’s PEG ratio of 0.45 which is below 1 indicates that there is potential for further share price appreciation given the company’s current growth rate."

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Permalink Reply by Keith Musgrave on January 28, 2009 at 3:07pm

Hi Guys,
I just thought I would try to assist here. PE ratio is the ratio of the "income/dividend generated by a share as a ratio to the cost of the share". (Share price $20.00 to dividend of $1.00 = a PE ratio of 20) This can be a simple and quick look at whether the company appears to be trading at a profit. The problem is that the dividend paid might not be a reflection of actual earnings. Eg. some companies may pay a dividend with borrowed funds and the company actually made a loss. There are (many) other indicators of the companies strength. One is EBITA which is "earnings before income tax, depreciation and allowances" which should better reflect the cash flow position of the company.
As for a useful rule of thumb, I would suggest "homework". To be successful in investing in shares, you really need to do your homework. Look at the net asset base of the company and how much debt it has. Look at the type of business it is and its likelyhood of being able to continue to profit in uncertain times. Like Harvey Norman, (this is not a recommendation to buy HN shares) who should be able to continue to profit in the current environment, all be it, profit less.
As for managed funds, I think that they are gravy trains set up by companies to milk the public of as much as they can by way of internal and hidden fees. They buy and sell shares off and to one another and every time they trade they get paid a commission. 1 fund will buy 100,000 ABC shares (and get paid for the transaction) and in a weeks time they sell the same parcel of shares to another of their funds and get paid for that transaction. Their basic fee is the "MER" which is the Management Expense Ratio" which is between about 0.5% up to about 4%. You dont know when the MER is charged. It is an annual fee, but if the MER is 1%pa, do they charge the 1% to the fund everyday??? Their are also fees that are factored into the running of the fund. They pay the managers bonuses for certain achievements. But the achievements might not be acceptable to you and I. Many funds lost substantial value in their investors funds, but will still get paid large bonuses for incredible underperformance. The other issue is "how many times does a particular amount of money get handled? Everytime your money gets handled, you pay a fee for that transaction. Those fees and charges are not governed or investigated or reported to the investor.
I spent 6 years with Westpac, and to this day continue to be confused by prospectuses stating that the average 5 year return was X%, but non of my clients balances were reflecting the published returns. I had 1 client who invested $40,000 into a fund. He paid 3% entry fee, ($1200) and after 5 years his fund had grown to about $45,000. Hardly the 5% income and 7% growth stated in the prospectus. (These figures are not exact to protect the innocent).
I am a strong supporter of investing in shares, but you must do your homework.
I have always been a long term investor, usually liking to buy good quality shares (blue chips) especially when they are getting some bad publicity. I purchased some NAB shares after they had dropped from $33.00 to $20.00 and sold them about 18 months later for $34.80.
There is another saying in investing (re managed funds) that when you give away control of your money, you have given away your money.
I hope this helps and look forward to lots of feedback
Regards
Keith

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Permalink Reply by Bytta on February 2, 2009 at 12:03pm

Great advice Keith!

I think we all take for granted the published returns when the actual figure does not reflect it. I have some money in managed funds (and have individual shares portfolio too). the published return is shown as a moderate dip but the figure in the quarter statement begs to differ.
I stopped a big chunk of my monthly contribution for a while now and decide to do it myself (and pay myself of course :))

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Permalink Reply by Keith Musgrave on February 2, 2009 at 6:00pm

Hi Bytta,
It is quite a simple process with shares and managed funds. You have $X and you purchase either shares at a price or units at a price. You hold those investments for a period of time and then sell them. You sell them at a certain price and compare the difference which reflects either your profit or loss. Quite simple really!!!
My problem is that the returns published in the prospectus did not seem to reflect the actual return that the investor was getting. What I don't know is how the fund manager "arrives" at the published return. Is it before they take their fees, or is the return published a "simple" return, or theoretical return, or what??? I suspect that there are a great deal of fees that are charged to the overall fund that the individual unit holder does not about or is not aware of. I have never sat down to read the actual "trust deed" to familiarise myself with the actual running of the fund.
That is why I prefer to invest in direct shares.
Bye for now
Keith

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Permalink Reply by JeffK on February 3, 2009 at 3:34pm

I'm with you Keith. Why pay someone a fortune to lose my money when I'm quite adept at doing it for free ;)

JFK

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Permalink Reply by Keith Musgrave on February 4, 2009 at 4:36pm

Hi Jeff,
I believe that when I purchase shares in a company, I become a part owner of the company in the same vein as other shareholders. Therefore, the company and its staff are working to make the company profitable so that it will provide benefits to me and all stakeholders.
The problem with managed funds is that it all sounds great in theory, but the management team have no stake in it. Their expertise is normally employed across a number of funds via a fund manager, (for whom they work). There is nothing to prevent a fund manager to buy and sell securities from one of their funds to another. I challenge sometimes why shares in companies seem to be traded between entities managed by the same manager. I see this in the "Notice of substantial change in ownership" reports that are freely available on the ASX. I strongly believe that on occasions this happens when possibly it is unwarranted.
Each time this occurs there are fees and brokerage paid which comes from the profit of the fund. I was recently made aware of substantial bonuses that are paid to the fund manager even in times when unit prices have tumbled. This is grossly unjust and not in the spirit of why they are employed as fund managers. They are employed on the basis that their expertise is in the best interests of unit holders, however, I think that some, if not many, simply see these funds as very profitable for their own companies. I have never been able to come to terms with a company managing a unit trust withh $100,000,000 with an MER (Management Expense Ratio) of 1% ($1,000,000). Would you undertake that responsibility for $1 million bucks (before costs). So why do they. What about companies who have billions under management. $1 billion for a return of $10 million?? I don't think so!!!
Maybe there are people who read this forum who are involved in, or are employed by fund managers who can "set me strait".
I wonder if the silence will be deafening.
Regards
Keith

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