Question

Respond to the following paragraph :

The features that drive the valuations that differ in Vegas Chips are: The forecasted rate of growth of earnings per year, the way the ratios change over the years and the dividend pay ratio of earnings.

The additional information that would be required by the investors to gain confidence in the projections would be to look at the reports done by the analysts and see the connection in the investing pattern. With that information they should plan whether to invest in the project or not. They should see what factors are affecting the companies growth, the competition in the industry, the probability of multiple projections, earning and dividend payouts.

Answer 1

As a rationale investor, a person should look for the mentioned factors i.e. growth rate of earnings per year; change in ratios and dividend payout. These factors give the following insights:

Growth rate of Earnings per year: This means that how much the company is earning from the funds invested by the investors. This shows return on investments. If the company is earning better than the rate offered in open market on same risky investment then the investor should keep his/her money invested in the company. Otherwise they should go for other better options available in the market. Further, this factor is inversely linked with dividend payout. If company is earning better return on its investment than the rate available in market, then instead of opting for dividend payout investor should go for dividend reinvestment model. This is so because if company will pay dividend to investor then investor will invest it in market at a lesser rate of interest while funds being invested in company will leads to higher rate of return.

Change in ratios: Ratios provide comparative insights in company's business e.g. how much profit is in ratio to sales; how much stock holding we are doing to earn this much sales etc. So, they are some key ratios which are necessary to analyse while taking investment decisions that are Debt Equity; Price Earning ratio; Multiplier ratio etc. These ratio gives a picture of company's future.

Dividend Payout: This basically provide details of amount of dividend that is paid to the investors. However, just on the basis of ratio one should not decide. This is so because this factor is inversely linked with growth rates of earning. If company is earning better return on its investment than the rate available in market, then instead of opting for dividend payout investor should go for dividend reinvestment model. This is so because if company will pay dividend to investor then investor will invest it in market at a lesser rate of interest while funds being invested in company will leads to higher rate of return.   

Further, other qualitative factors can also be analysed like growth in that specific industry and comparison of industry growth with company's growth. This will give an idea of performance of that company and scope of further growth. Further, SWOT analysis (Strength, weakness, opportunity and threat) will also assist our analysis as it will provide us detail of threat to the industry and level of those threats right now. In case the threats are getting stronger they will act as early warning signals to draw out your money.