Question

List and explain (1-2 sentences for each suggestion) 6 factors commonly considered to assess a company as an investment

1. Perks

2. Income –dividend-yield

3. Growth- capital gain –earning per share

4. P/E ratio(low)

5. EV/EBITOA.

6. Price to earnings growth (PEG)

Answer 1

Before investing in a company, it’s important to assess the risks and rewards as benchmarks to proceed further. By using a combination of quantitative and qualitative criteria, one can determine the outcome of the investment. The most acceptable criteria is to assess the company’s financial ratios.

Perks: Some companies offer additional benefits to their shareholders when they invest in their shares. For example, a Company named ABC Publications offers a discount card of 35% on all their publications if investors hold a minimum of 10 shares.

Income-Dividend Yield: This financial ratio measures the return on a dividend as a percentage of the stock price. The dividend yield indicates how much cash flow one will be getting for the money invested, all other things being equal.

Earnings Per Share: EPS is the amount each share is entitled to if a company paid out all of its profit to its shareholders. It helps in the comparison between different companies of the same industry, companies with consistent earnings growth will often outperform as compared to others

P/E Ratio: P/E ratio measures the relationship between a company’s earnings with the price of the share. It indicates whether the share is overpriced or underpriced. Usually, companies with low P/E ratio indicates that the current stock price is low relative to earnings i.e. undervalued.

EV/EBITDA: This ratio is used to compare the entire value of the business with the amount of EBITDA it earns on an annual basis. It tells the investors how many times of EBITDA they have to pay to acquire the whole business.

Price to earnings growth (PEG): The PEG ratio is used to calculate stock’s true value. It adjusts the P/E ratio by taking into account the future expected growth rate in earnings per share and similar to the P/E ratio, a lower PEG may indicate that a stock is undervalued.