The early parts of this century were painful years for most foreign investors with world markets falling significantly. I believe it is important that investors pay more attention to fundamentals when making their investment decisions. The purpose of this article is to highlight main financial tools that investors should apply when making investment decisions.PRICE EARNINGS RATIO The most important ratio that investors should look at is Price Earnings (P/E) Ratio. In layman’s terms this is share price divided by profit per share. The P/E Ratio of a Company should be compared against other companies in sector and against market as a whole. I also believe a good test is to compare P/E Ratio of a company with other similar companies quoted on other international stock exchanges.
The P/E Ratio to be used in investment decisions should be prospective P/E Ratio and not historical P/E Ratio. Unfortunately in most of financial press P/E Ratio stated is historic one that may not reflect future prospects of a business. Hence investors should look at P/E Ratio based on current and future earnings and not previous year’s figure.
An illustration of how an investor could properly carry out this exercise is as follows: A food retailer has a Prospective P/E Ratio of 10 times. It is currently expanding into all towns in Cyprus by opening new supermarkets. Its main competitor in Cyprus is estimated to have a Prospective P/E Ratio of 15 times. When one compares rating to other international quoted businesses in same sector one has found that these businesses command a P/E Rating of 20 times. This information would appear to indicate that investor should seriously consider an investment in this company since there is a case to suggest it is under valued.
NET ASSET VALUE (NAV): A useful ratio for evaluation of investment companies is net asset value per share. In Cyprus most companies disclose their NAV on a two weekly basis whereas some companies go as for as to disclose figure on a weekly basis.
In my opinion, those companies that have an NAV that is lower than share price should be tread on carefully by investors since they have a higher risk. The opposite is true for investment companies that are at a huge discount to their NAV.