Forum Archive Index - October 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Shayne,
 
> 
> My question to everybody is: When you see a company that you are
> interested in investing in, what is the most important analysis that
> you do? What formulas do you use in order to determine whether or not
> this will be a good company to invest in?
> 

I think that there are two fundamental ingredients to successful 
sharemarket investment:

1/ Value
2/ Quality 

Any financial formulae you use should be viewed  as are merely tools 
towards these two goals.

The primary determining factor in how successful and investment will be 
is, IMO, how cheaply you can buy into it.    Dividend yield is often 
something I look at as an initial value indicator.    This is because it is 
usually an easy figure to get.    The newspapers publish it for NZSE and 
ASX companies daily.

Nevertheless there are many reasons why you would not invest in a 
company with a high dividend yield.   The apparently high yield may be 
based on past factors (e.g. a one off special dividend) that will not be 
repeated.   The company may have high capital reinvestment 
requirements.    It may be part of a sunset industry that is simply no 
good.  The company may be having trouble covering its interst bill.  So 
IMO you would be foolish to invest on the basis of dividend yield alone.
But for a one off indicator, it is probably not a bad place to start.

As an indicator for 'quality' I would say that ROE is not a bad single 
indicator figure.    Return on shareholders equity is is a measure of what 
kind of return is being excised from the shareholders funds in the 
business.  Some might call ROE a measure of financial efficiency.  Or 
resilience - the ability to recover quickly from unexpected market 
shocks.

As with any single indicator, there are plenty of reasons not to dive into 
investing with a company that has high ROE.   One way to get high ROE 
is to operate a company with lots of debt.   This is not always a good 
thing.    It is highly likely that many high ROE companies have already 
been recognised by the market and are 'fully priced'.      There is no 
point in investing in a company like that.    Nevertheless as an intial 
screen of financial efficiency I'd be hard pressed to leave ROE out of the 
equation.

SNOOPY


--
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on Pegasus Mail version 4.02
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you have to cut down all the trees."




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