29 August 2014

Fundamental Analysis - PB Ratio, PE Ratio and Dividend Yield

Yesterday there was a property information / education show in TV 8 (in Singapore) to introduce the commercial property investment. In the show, the guests gave some examples of how to define good investment, such as the rental yield was 4-5% for commercial buildings as compared to 2-3% for private residential buildings, and potential capital gain is higher for commercial buildings as compared to residential buildings. At the same time, the guests suggested to use "leveraging" method for property investment. For example, if you have S$1,000,000 in bank account, you could borrow up to 80% of the total property value. You could take up to 80% loan or S$1.2 million for S$1.5 million investment and S$300K cash deposit plus S$100K all relevant charges. If you are financially sound, you can take up to 2 commercial buildings with S$1.5 million each. Of course, you have to take into consideration of the underlying risk involved, and that is why even though the rental yield is higher for commercial buildings, it also requires you to have stronger holding power so that you could afford to pay for the bank loan while waiting for new tenants to rent it from you.

In shares investment, the so called fundamentalists will refer to "Relative" comparison methods to determine whether this counter is trading cheaper or more attractive to other counters / companies in same industries. However, do note that this is not the only way for picking the right counter. You still need to do more homework in order you can be more confident in your company selection.

Price / Book Ratio: 

The formula is the market share price dividend by the book value. This is more suitable for companies with more liquid assets such as financial institution. In current market, DBS trading at lowest PB ratio while UOB trading at highest PB ratio and OCBC is in between DBS and UOB. Some analysts will say that based on current PB ratio, it is wise to pick DBS as it was having the cheaper valuation. With acquisition of Wing Hang Bank, OCBC may need to raise up additional fund via equity financing, which is the most expensive way to do so.

Nonetheless, you should look at your own investing profile and think how long is the holding period you wish to hold. Different holding period requirement may result in different selection.

Price / Earning Ratio:

The formula is market share price divided by the net earning per share (EPS). This is more volatile financial ratio as different sector may have different earnings trend and it results in a huge difference in PE ratio in different years even for the same company itself. The best example is construction / property development sector. During the bad time, the developers could only sell a little properties while maintaining high fixed cost. When economy picking up, developers could sell a lot more (could be 2 / 3 times more than bad time), and you will not be surprised to see a low PE ratio among property / construction counters as investors may look at longer prospective (take into consideration of the bad time performance as well ).

PE ratio somehow is also very good be used in stable industries such as retail / food & beverage industries that provides sustainable / consistent earning prospect and it is not that volatile during bad / good time.

Dividend Yield:

Dividend yield is another financial ratio which is preferred by passive investors who is more relying on dividend income than capital gain for their investment purpose. The formula is dividend per shares dividend by market share price.

The pros is that you could easily look through those counters that providing you good dividend yield so that you will not be easily affected by the share price movement as your main objective is to collect the cash flow via dividends but not the share price gain.

The cons is that normally for counters with good dividend yield, it may not have a fast growing potential. For example REITs that giving you 5% - 10% may not be able to give you a good capital gain prospect as they normally need to grow the net earnings via rental rising / Asset Enhancement Investment (AEI) which is not giving you a high growth potential. 

Another reverse examples are for high growing companies that requires net earnings to be kept for investment such as Ezion and Sino Grandness, and they normally would keep money for future growth needs.


It is wise for a you to decide which method suits you most, as different investor have their own different criteria in picking up a share for their investment (whether it's for long term or shorter term). Do more homework by keeping track the companies in your watch list, learning how they run their business in order to have sustainable growth, and you will find your perfect choice your own way.

1 comment:

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