Monday, March 25, 2013

PEG Ratio

Hey there

How is everyone going? This year has progressed so quickly, I’m almost done with my first rotation, got 4 pay checks already but still struggling to break even thanks to random unavoidable spending like expenses related to moving from Newcastle to Canberra, telephone and internet connection fees and things like that.

Anyhow, continuing with this year’s project, the next indicator on the list is P/E growth ratio or PEG ratio.

PEG Ratio = P/E ratio ÷ annual EPS growth

We should all know what a P/E ratio is by now. EPS growth or earnings per share growth is fairly straight forward as well I guess, if the EPS grows from 10 cents to 11 cents, that is a growth of 10%. So if the P/E ratio is 10 and the EPS growth is 10, that gives us a PEG Ratio of 1. The theory is that if the company is fairly priced, its P/E ratio will equal its growth rate (PEG Ratio of 1). If the PEG ratio is below 1, that could indicate that the stock is underpriced and if it is above one, it could mean that it is overpriced.

Sometimes the PEG ratio could be a negative number, is those cases, the company’s earnings are expected to decline.

Keep in mind that different websites calculate the PEG ratio differently. They can either a projected or trailing P/E ratio and annual growth rate may be the expected growth rate for the next year of the next five years. So just keep in mind that PEG ratios can be different depending on where you look.

I personally do not look at PEG ratio much. I sometimes look at it when a company have a very high P/E ratio and if the PEG ratio is low, it could mean that the high P/E ratio is backed by a high growth rate.

I don’t really know how good or reliable it is as an indicator for value of a stock. But I’ll have to say like all other indicators, it is probably a good idea to not just base an investment decision on the PEG ratio. Remember to look at the entire company as a whole and of course ask for advice from a financial planner.

Feel free to leave a comment or shoot me an email. I’m happy to hear your opinions on PEG ratios.

Monday, March 11, 2013

First trade of 2013

Hey there,

If you’re still a frequent visitor of this site, you might have noticed that last year was a very quiet year for me financially. I probably executed a total of 5 trades on my account; most of them buys and wrote two posts for this site. Most of my efforts went into not failing final year of medicine, even so I failed my psychiatry short cases and had to repeat it. Thankfully I passed it the second time and I’m a registered doctor working in Canberra now!

With a new career come new responsibilities, obviously. One of the big ones is tax. My situation tax situation is quite interesting this year. Australia’s financial year ends in the middle of the year, so 30th June. I started working in January that means my taxable income for this financial year is only half of my year’s salary (which is not a lot). On top of that, being a doctor working in a public hospital, we get other benefits like fringe benefit tax and other salary packaging goodies. If I put all of them together and cleverly and legally deduct tax deductable items I’ll be paying very very very little tax for this next 6 months, which is nice but is also a very rare opportunity, unless I stop working for 6 months in the future. Starting next financial year I’ll suddenly be taxed a lot because I would have been working the full financial year.

Taking all of that into consideration, I have decided to liquidate my (very small) share portfolio. This is how the trades look like.

As a result of making this decision, capital gain from the shares are 18.72% which is not bad considering the ASX S&P 200 returned about 7.5% in the last 3 years. I certainly got lucky with Flight Centre. I’m not sure how much I gained from dividens because I lost track :P so we’ll exclude that for now. Only half of the capital gains will be taxed because I’ve held them for more than a year and from the taxable half, my tax rate will be around the 15% mark this financial year. If I sold it after 30th June, my tax will be more than 30%, saving 15% there.

Besides the tax savings, this decision has given me the opportunity to “reset” my investment portfolio. Now because my portfolio is small and if I want to save for a home loan deposit, I cannot afford to lose my capital. I’ll focus on saving a portion of my salary, capital preservation and low risk investments like Index Traded Funds, term deposits and high interest online banking accounts (Combank’s goal saver account pays 4.6% if you increase your balance by 200 every month at the moment). Maybe allocating a small small amount of my capital to more risky small caps – one that really interests me at the moment is Greencross LTD.

Good or bad, the decision was made and executed. I thought it was an allright decision and hopefully wouldn’t regret it in the future. What do you think? Had I done something foolish? Would you have made the same decision if you were in my situation? Do leave a comment or send me an email, I’m always happy to hear different opinions.

Monday, March 4, 2013

P/B Ratio

Hey there

So as promised, today I’m going to write a bit about what I know on price to book ratio (P/B ratio). Much like P/E ratio, P/B ratio is an indicator that can be used by value investors to signal if a company is under or overvalued. Also like the P/E ratio, it should not be used alone to judge a value of a company, if a low P/B ratio consistently points us to an undervalued company, we’ll all be rich.

To calculate the P/B ratio you divide the price per share by the book value of the equity:
P/B ratio = Price per share/Book Value
Book value is the company’s assets minus its liabilities.

So from that formula, we can say that the P/B ratio compares the current market valuation of a company to the value of the company’s assets. A P/B ratio of less or equal to 3 typically interests value inventors because it could mean that the stock is selling at a discount to its fair value.

A company’s P/B ratio can be calculated including or excluding its intangible assets and goodwill. A P/B ratio calculated without intangible assets and goodwill should technically be called price to tangible book value.

Personally, I like to look at the price to tangible book value to get an idea of what might happen if the company that I'm deciding to invest in goes bankrupt. Obviously when a company goes bankrupt, one of the things they can do is to break up the company into little packages and sell off their assets in blocks to other people. By looking at the P/B ratio I sorta get an idea of how much of a premium above the company’s assets I’m paying.

Thanks for reading, hope you’ve learnt something from the post. Is the P/B ratio one of your favorite indicators? Or you don’t even look at it. Do leave a comment or send me an email if you have anything to add. Next week I’ll write about my first trade in 2013. Have a great week!