Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                

Peer Analysis: Stock Selection

Download as pptx, pdf, or txt
Download as pptx, pdf, or txt
You are on page 1of 17

PEER ANALYSIS

FOR

STOCK SELECTION
Peer company
• Peer Company mean companies in the same
industry which have comparable revenues.  
• For Example:
 
• Company “A” has revenue of 100 Crores
 
• Company “B” has revenue of 5,000 Crores
 
• Company “C” has revenue of 7,000 Crores
 
• Company “D” has revenue of 150 Crores and
 
• Company “E” has revenue of 200 Crores
 
• All these companies are in the same industry. But all are not peer
companies. Company “B” and “C” are peer companies, while
company “A”, “D” and “E” are another set of peer companies.
 
Why Peer analysis ?
• We cannot compare the financial parameters
of a huge company with a small one. It is not
justified and will not give a correct picture of
which company is relatively good or bad.
• But when we compared the relatively same
size companies then it gives a better idea of
which company is better then the other based
on certain financial parameters.
Financial parameters
• For every company, there are three important financial
statements to examine and compare:
– The Balance Sheet
– The Income Statement
– The Cash Flow Statement
• The balance sheet tells investors how much money the
company has, how much it owes, and what is left for the
stockholders.
• The cash flow statement is like the checking account; it
shows where the money is spent.
• The income statement is a record of the company's
profitability. It tells you how much money a corporation
made (or lost).
Income Statement Related Ratios:
 

• Earnings per share ratio (EPS Ratio) is return on per equity


share and is calculated by dividing the net profit after taxes
and preference dividend by the total number of equity shares.
• Formula of Earnings Per Share Ratio:
EPS= (Net profit after tax − Preference dividend) / No. of
equity shares (common shares)]
• when compared with EPS of similar companies, it gives a view
of the comparative earnings or earnings power of the firm. EPS
ratio calculated for a number of years indicates whether or not
the earning power of the company has increased.
Con..
• Price earnings ratio (P/E ratio) is the ratio between market
price per equity share and earning per share.
• [Price Earnings Ratio = Market price per equity share /
Earnings per share]
• This is the most common ratio used for comparing companies.
PE ratio simply means how much an investor is willing to pay in
the market for Rs. 1 of company earnings. So, if a company has
a PE ratio of 10, it means that investors are willing to pay Rs. 10
in the market for every rupee of the company earnings. When
comparing companies the thumb rule is – lower the PE ratio the
more undervalued the company is relative to its peers.
•  
Con..
• PEG Ratio = PE Ratio / Growth

• PEG Ratio: This ratio is applicable mainly to high growth industries.


For companies growing at 50-60% or even more the PE ratio is not a
great indicator of valuation. For such companies PEG ratio is used.  

• The growth here is the revenue growth rate for the company. Example:
A company has a PE ratio of 50. This looks high and we would say that
the company is overvalued. But suppose that the company is growing
at 100% annually. So PEG ratio for the company is 0.5 (50/100).

• A PEG ratio of less then 1 means the company is undervalued with


respect to its future growth potential. A PEG ratio of over 1 indicates
that the company is overvalued with respect to its future growth
potential.
Con..
• Gross Margin, Operating Profit Margin and Net Profit Margin: It is
very important to compare these margins for peer companies. If in
the same industry a company has a better gross, operating and net
profit margin then its peer then it makes a big difference. It shows
that the company is more efficient and better equipped to control
its cost then its peers
 
• Gross Margin = (Revenue – Cost of Sales/ Revenue)*100

• Operating Profit Margin = (Earnings before Interest and


Tax/Revenue)*100 

• Net Profit Margin = (Net Profit / Revenue)*100


Con..
• Price/Sales Ratio: This is another simple to calculate as well
a very useful ratio to do peer analysis and valuation. The
lower the price/sales ratio, the more undervalued the stock
is as compared to its peers.

• Price/Sales Ratio = Stock Price/Sales per share

• Sales per share can be calculated in the same way as we


calculate EPS. I.e. Sales/Shares outstanding
 
Balance Sheet Related Ratios:

• Return on Equity: This is one of the most important


ratios as it shows how efficiently the company has
been using the shareholders money. The higher the
ratio the better it is and indicative of an efficient
management. So among peer companies this ratio
can be used as a big differentiator between good,
medium or bad managements.
• Return on Equity = Net Income/ Shareholders
Equity
con..
• Return on Assets: This is another important
ratio for giving investors an idea about how
good the management is in utilizing its assets
to generate returns for its shareholders. So
the higher the ROA, the better is the company
in extracting maximum use of its assets to
generate returns for shareholders.
• Return on Assets = Net Income / Total Assets
Con..
• Debt Equity Ratio: For the same size companies
in the same industry it is important to know the
debt equity ratio. In general the lower the debt
equity ratio the better it is for the company. The
most important reason is that it reduces the
interest burden for the company. It has better
prospects for future expansion. It gives better
results in recession also.
• Debt Equity Ratio = Total Debt / Equity
Cash Flow Related Ratios

• Operating Cash Flow per Share: This ratio is the


most important ratio to look at in the cash flow in
my opinion. This will give the real cash inflow for
the company per share for any given year. So
among same size companies, if a company has
higher operating cash flow per share then it’s a
much better then a company having low or
negative operating cash flow per share.
• Operating Cash Flow per share = Cash flow from
operations / Number of shares outstanding
Con..
• Capital Expenditure per share: It is the capital expenditure
which tells how much the company will expand in the future
in terms of its size and revenue. So among same size
companies if a company is going for higher capital
expenditure per share then its likely to have higher revenue
growth also in the future. So among peer companies always
go for the company with higher Capex per share.

• Capital Expenditure per share = Capital expenditure /


Number of shares outstanding
Example : Banking sector
Name of company sales (Rs. in crore)
State Bank of India 26,312.95
ICICI Bank Ltd 5812
HDFC Bank Ltd 4810
Axis Bank Ltd 3624.25
yes bank 2369.71
Ing vysya bank 638
Kotak Mahindra Bank Lt 1014.72
d
THANK YOU

You might also like