Price-to-earnings ratio is a valuation measure that compares a company's earnings per share (EPS) to the current market price. This metric is widely known and used as an indicator of the company's future growth potential. The price-earnings ratio does not reveal a complete picture, and it is most useful when comparing firms in the same industry only or comparing firms to the general market.

 

 

Typically, a high P / E ratio means that the market is willing to pay a higher price compared to the earnings because there is an expectation of future growth in the company. Tech stocks, for example, usually carry high P / E ratios. A lower price-return ratio indicates that the market expects less growth in the company or perhaps less favorable macroeconomic conditions that may harm the company. As a result, despite its earnings, the stock will usually sell somewhat if it has a low P / E because investors do not believe that the current price justifies the earnings expectations.

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Price / yield deficit

There are problems that arise with the use of the P / E ratio for investors. The share price can rise if the investors are overly optimistic causing the price-earnings ratio to rise. Also, the profit share of the scale can be manipulated to some extent if the company's profits are fixed, for example, but the company's management reduces its outstanding stakes, thus boosting the company's profits on a per share basis.

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Advantages of using the EV / EBITDA multiplier

The EV / EBITDA ratio helps mitigate some of the declines in the price-return ratio, which is a financial metric that measures the return a company makes on its capital investments. EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. In other words, EBITDA provides a clearer picture of a company's financial performance because it excludes debt costs, taxes, and accounting measures such as depreciation, which spreads the costs of fixed assets for many years.

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 One of the most effective ways to use the EV / EBITDA value is comparative evaluation where the scale is used to evaluate similar firms in the same industry.

The other component is enterprise value (EV), which is the sum of equity or the market value of the company plus its debt minus cash. Electric vehicles are commonly used in acquisitions. The EV / EBITDA ratio is calculated by dividing EV by EBITDA for a more comprehensive profit multiplier than the P / E ratio.

 

Disadvantages of EV / EBITDA

However, the EV / EBITDA ratio does have its drawbacks, such as the fact that it does not include capital expenditures, which can be important for some industries. As a result, it may result in a more favorable multiplier by not including these expenses.

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Although calculating this ratio can be complicated, the EV and EBITDA value of publicly traded companies are widely available on most financial websites. The ratio is often preferred over other measures of return because it normalizes differences in taxes, capital (debt) structure, and number of assets.

 

P / E Ratio vs EV / EBITDA

The price-earnings ratio has been established as a primary metric for evaluating the market, and the sheer volume of current and historical data gives metric weight with respect to inventory analysis. Some analysts contend that using EV / EBITDA versus the price-return ratio as a valuation method produces better returns on investment.

 

Both scales have inherent advantages and disadvantages. As with any financial metric, it is important to consider several financial ratios including the P / E ratio and the EV / EBITDA ratio in determining whether the company is somewhat overvalued, overvalued, or undervalued.

SWOT analysis is a method for evaluating the performance, competition, risk, and potential of a business, as well as a part of a business such as a product line, division, industry, or other entity.

 

 Using internal and external data, a SWOT analysis can tell a company where it needs improvement internally, and also aid in developing strategic plans.

Using internal and external data, this technology can guide companies toward strategies that are most likely to be successful, and away from those that have been or are likely to be least successful. Independent SWOT analysis analysts, investors, or competitors can also guide them about whether and why the company, product line, or industry is strong or weak.

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Analysts present a SWOT analysis as a square with each of the four domains making up one quadrant. This visual arrangement provides a quick overview of the company's status. Although all the points under a particular heading may not be of equal importance, they should all represent basic insights about the balance of opportunities, threats, advantages, disadvantages, etc.

 

 

SWOT analysis was first used for business analysis. Now it's often used by governments, nonprofits, and individuals, including investors and business.

 

Example of a SWOT analysis

In 2015, a SWOT analysis of Coca-Cola's Value Line indicated strengths such as the world-famous brand name, extensive distribution network, and opportunities in emerging markets. However, he also cited vulnerabilities and threats such as foreign currency fluctuations, growing public interest in "healthy" drinks and competition from healthy beverage suppliers.

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His SWOT analysis prompted the Value Line to ask some tough questions about Coca-Cola's strategy, but also to indicate that the company "will likely remain a top-tier beverage provider" providing conservative investors with "a reliable source of income and little capital gain exposure."

 

Five years later, the SWOT analysis of the Value Line has proven effective as Coca-Cola remains the sixth strongest brand in the world (as it was at the time). The value of Coca-Cola shares (traded under the ticker symbol KO) rose by more than 60% in the five years after the analysis was completed.

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The strengths describe what the organization excels at and what separates it from the competition: a strong brand, a loyal customer base, a strong balance sheet, unique technology, etc. For example, a hedge fund may have developed a proprietary trading strategy that returns results of outperforming the market. You must then decide how to use these results to attract new investors.

Weaknesses prevent the organization from performing at an optimum level. They are areas where the business needs improvement to remain competitive: weak brand, above average turnover, high levels of debt, insufficient supply chain, or lack of capital.

Opportunities refer to favorable external factors that can give the organization a competitive advantage. For example, if a country lowers tariffs, a car manufacturer can export its cars to a new market, increasing sales and market share.

Threats refer to factors that are likely to harm an organization. For example, drought is a threat to a wheat producing company, as it can destroy or reduce crop yields. Other common threats include things like high material costs, increased competition, labor scarcity etc.

Advantages of a SWOT Analysis

A SWOT analysis is a great way to guide business strategy meetings. It is a powerful thing to have everyone in the room discussing the company's core strengths and weaknesses and then move from there to identify opportunities and threats, and finally share ideas. Often times, the SWOT analysis you envision before a session changes all the time to reflect factors you were not aware of and would never have picked up without group input.

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A company can use the SWOT for overall business strategy sessions or for a specific sector such as marketing, production or sales. This way, you can see how the overall strategy developed from the SWOT analysis will move to the parts below before committing to it. You can also work backwards using the sector-specific SWOT analysis that feeds into the comprehensive SWOT analysis.

Price-to-earnings ratio (price-earnings ratio) is the valuation ratio of a company that measures its current share price in relation to earnings per share (EPS). The price-earnings ratio is sometimes also known as the price multiplier or the earnings multiplier.

 

Forward rate to earnings

These two types of EPS metrics are a factor in the most common types of P / E ratios: forward return and P / E ratio. The third and least popular variation uses the sum of the last two actual quarters and estimates for the next two quarters.

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P / E uses future (or leading) earnings guidance rather than trailing numbers. This forward-looking indicator, sometimes called the "Estimated Profit Rate", is useful for comparing current earnings with future earnings and helps provide a clearer picture of what profits will look like - without other accounting changes and adjustments.

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However, there are problems inherent in the forward price-to-earnings scale - that is, firms can reduce earnings in order to overcome the price-to-earnings estimate when announcing next-quarter earnings. Other companies may overestimate them and later adjust them with their next earnings announcement. Moreover, outside analysts may also provide estimates that may differ from the company’s estimates, creating confusion.

 

Trailing price to earnings

The delinquent profit / loss price is based on past performance by dividing the current share price by the total EPS earnings over the past twelve months. It is the most popular price / return measure because it is the most objective - assuming the company accurately reported earnings. Some investors prefer to look at the P / E ratio because they do not trust another individual's earnings estimates. But late P / E also has its share of shortcomings - that is, the company's past performance does not indicate future behavior.

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Thus investors should commit money based on the strength of future earnings, not the past. The fact that the EPS number remains constant, while stock prices fluctuate, is also an issue. If a major event for a company causes the share price to rise or fall dramatically, then the late price / return will be less reflective of these changes.

 

The price-to-earnings delinquent ratio will change as the company's share price moves, as earnings are only released every quarter while the shares are traded day in and day out. As a result, some investors prefer futures contracts P / E. If the forward P / E ratio is lower than the P / E ratio, then analysts are expecting increased profits; If the forward P / E is higher than the current price-earnings ratio, analysts are expecting a drop in profits.

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Rating from P / E.

The price-earnings ratio or P / E is one of the most widely used stock analysis tools that investors and analysts use to determine a stock's valuation. In addition to showing whether a company's stock is overvalued or undervalued, P / E can reveal how the stock valuation compares to its industry group or a benchmark like the S&P 500.

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Basically, the price-earnings ratio refers to the dollar amount an investor can expect to invest in a company in order to obtain one dollar of that company's profits. This is why P / E is sometimes referred to as a price multiplier because it shows how much investors are willing to pay each dollar of profits. If the company is currently trading at a P / E multiplier of 20, the explanation is that the investor is willing to pay $ 20 for $ 1 in current earnings.

 

The price-to-earnings ratio helps investors determine the market value of a share compared to the company's earnings. In short, the P / E ratio shows what the market is willing to pay today for a share based on its past or future earnings. A higher dividend price may mean that the share price is high relative to earnings and may be overrated. On the contrary, a decrease in price may indicate profitability which indicates that the current share price is low in relation to earnings.

 

Example of a P / E ratio

As a historical example, let's calculate Walmart Stores Inc.'s P / E ratio. (WMT) As of November 14, 2017, when the company's share price closed at $ 91.09.2, the company's earnings for the fiscal year ending January 31, 2017 were $ 13.64 billion, and the number of shares outstanding was 3.1 billion. Earnings per share can be calculated as $ 13.64 billion / 3.1 billion = $ 4.40.3

 

Thus, Walmart's P / E ratio is $ 91.09 / $ 4.40 = 20.70 times.

How to overcome investment hurdles

We live in a culture of rights, and we expect instant gratification for the things we crave, whether it's the latest tech gadget, sushi, or a trip to Las Vegas. However, every time we pay for something, we have less money to spend on other things, including our investment goals. Unfortunately, many people lack the discipline or willpower to give up on immediate pleasures in order to thrive in the future, creating a very damaging feedback loop over time.

 

A 2015 study on goal setting by Dr. Jill Matthews, a researcher at Dominican University in California, San Rafael, found that participants between the ages of 23 and 72 who set their goals in writing and sent regular progress reports to their friends had a "much higher success rate." Of those who kept their goals to themselves. " In fact, more than 70% of respondents who wrote down and shared their goals reported success compared to 35% of those who maintained their goals. Goals for themselves, without writing them down.

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This is a great result, which applies directly to achieving investment goals and objectives, and provides an ideal pathway for people who lack the discipline or willpower to overcome their shortcomings in a life-changing way. The age diversity among participants also tells us that it is never too late to achieve realistic investment goals as long as we are willing to put in the extra effort, write them in detail and inform a helpful third party.

 

Of course, even disciplined people may struggle to stay on the financial track when life throws them a hard ball. Job loss, divorce, illness, or other adverse circumstances can put life at an unexpected juncture that negatively affects earnings and energy savings. Volatility can also affect financial markets and your savings, as it did in 2007 and 2008 when American investors lost trillions of dollars in their retirement accounts.

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Bear markets and crashes can be inevitable during the decades between your first contribution and retirement age, despite stats confirming impressive long-term equity returns. Many investors are not prepared for such volatile periods, and they often ignore good advice and give up long positions at competitive rates. It is easy to tell ourselves that we will stand firm when the next crisis occurs, but you will not know for sure until it occurs.

 

Pairs and targets of investment

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Pooling resources between husband and wife, related spouses or same-sex couples provides an ideal way to overcome the many challenges of setting investment goals. This approach requires deep confidence because breaking up later in life can have dire consequences. For example, a 2004 study found that roughly 14% of couples choose to keep their finances separate. It is important that both partners agree fully in advance on how to manage the pooled resources to reduce the chances of misunderstanding. The study also found that 70% of husbands talk about money on a weekly basis, which is both good and bad, because many of these arguments turn into hot arguments, according to a research paper published by the National Council on Family Relations in 2012. Reviewing these findings, the researcher at State University concluded Kansas, Sonia Brett, notes that "the arguments about money (are) by far the biggest indicator of a divorce." She also suggests that arguments about money can stem from "ingrained partner beliefs" that lead to entrenched, but often unconscious, biases resulting from early life experiences.

 

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Investment goals are spread over three branches, according to age, income and expectations. Age can be divided into three distinct sections: youth and beginnings, life expectancy, family building, seniors, and self-directedness. These labels often miss their marks for the right age, as middle-aged people seek investment for the first time or seniors are forced to set a strict budget, exercising the discipline they lacked when they were young.

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Income provides a natural starting point for investment goals because you cannot invest what you do not have. The first professional job issues a wake-up call for many young people, forcing decisions about 401 (k) contributions, savings accounts, or money market and lifestyle changes needed to strike a balance between increased affluence and belated gratification. It's common to experience setbacks during this period, to stumble upon expensive home rentals and car payments, or to forget that mom and dad are no longer charging your monthly credit card bill.

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Outlook describes the playground we operate in during our lifetimes and the choices we make that affect wealth management. Family planning is at the top of the list for most people, as couples decide how many children they want, their favorite neighborhoods and how many people paid they will need to match these goals. The career outlook matches these accounts, with highly educated people mounting in years of increasing earnings power while others are stuck in clogged jobs, forced to cut back on their expenses.

 

Investment targets become moving targets for many individuals, as carefully crafted plans face barriers in the form of layoffs, unplanned pregnancies, health issues and the need for elderly parent care. These unexpected challenges require a dose of realism when choosing to allocate your 401 (k) or deciding how to spend the year-end bonus, while ignoring the old axiom of "saving for a rainy day" by many people until it is too late.

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Fortunately, it is never too late to become an investor. You might be in your forties before you realize that life is moving faster than expected, which requires thinking about old age and retirement. Fear can dominate your thinking if you wait that long to set your investment goals, but that's okay if it adds a sense of urgency to wealth management. All investments start with the first dollar earmarked for this purpose, regardless of your age, income, or expectations. Of course, those who invest for decades have a huge advantage, while their increased wealth allows them to enjoy the fruits of their savings habits.

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Set up an investment goals workflow

Investment objectives address three main areas related to money and money management. First, it intersects with a life plan that engages our thought processes in unexpected ways. Second, it engenders accountability, forcing us to review progress on a periodic basis, invoking discipline when needed to stay on track. Third, the drive that affects our non-financial selves is created in positive ways that can improve our outlook on mental health.

 

Once established, an investment plan forces you to think about the sacrifices that must be made and the budgets to be balanced, and the realization that a delay or failure will have a direct and immediate impact on your wealth and lifestyle. Thinking and planning, allowing you to forgo the long-term approach. Dealing directly with things and prioritizing the things you really value in life.

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Use monthly or quarterly statements of accounts to review progress and recommit to your chosen life plan, and make small adjustments rather than big changes as the money flow improves or worsens. Review your annual earnings periodically, and enjoy seeing your fortune grow without direct intervention or leave check from your grandmother. Learn to handle lost periods in a mature way, using red ink to build patience while re-examining how your decision-making affects these negative returns.


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The Australian Investors Association recommends using the SMART format when setting investment goals. These are the elements:

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Specific - Make each goal clear and specific

MeSPAM BANble - Frame each goal so you know when to achieve them

Attainable - You need to take practical action to achieve a goal

Relevant - Determine if your goals are relevant and realistic

Time-based - Set a timeframe for each goal so you can track progress

Start writing a document or journal that lists each investment goal and how you will measure progress. List as much detail as possible, keeping both short-term and long-term goals in mind. Let's say you want to save for retirement but also plan to own a home in a safe neighborhood, with enough cash left over for an occasional vacation. Now review your current financial situation, and note how well or poorly the funds have been managed up to this point and the steps you would like to take to achieve this list of goals.

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While this information may be useful, it does not fully address an investor's concerns about risk. The field of behavioral finance has contributed to an important component of the risk equation, demonstrating the asymmetry between how people perceive gains and losses. In the language of probability theory, the field of behavioral finance introduced by Amos Tversky and Daniel Kahneman in 1979, investors are showing a loss aversion. Both Tversky and Kahneman document that investors have placed nearly twice the weight on pain associated with loss compared to the feeling of goodness associated with gain.


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Often times, what investors really want to know is not just how deviating an asset is from its expected outcome, but how the bad things look in the lower left side of the distribution curve. Value at Risk (VAR) attempts to provide an answer to this question. The idea behind the VAR technique is to quantify the loss in an investment with a certain level of confidence over a specified period. For example, the following statement might be an example of VAR: "With a confidence level of about 95%, the maximum you can lose on this investment of $ 1,000 over two years is $ 200." The level of confidence is a statement of likelihood that depends on the statistical properties of the investment and the shape of its distribution curve.


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Of course, even a procedure like VAR doesn't guarantee that 5% of the time it will be much worse. Spectacular disasters like the one that struck the hedge fund Long-Term Capital Management in 1998 remind us that so-called "emerging events" may happen. In the case of LTCM, the anomaly was the Russian government's default on its outstanding sovereign debt obligations, an event that threatened to bankrupt the hedge fund, which had highly leveraged positions of more than $ 1 trillion; Had it collapsed, it would have led to the collapse of the global financial system. The US government created a $ 3.65 billion loan fund to cover LTCM losses, enabling the company to survive market fluctuations and liquidation in an orderly manner in the early 2000s.

 
Manage experimental and passive risks

Another risk measure directed towards behavioral trends is regression, which indicates any period in which an asset's return is negative in relation to a previous high mark. In measuring regression, we try to address three things:

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The amount of each negative period (how bad it is)

Duration of each (how long)

Frequency (how many times)

For example, in addition to wanting to know if a mutual fund beat the S&P 500, we also want to know how relatively dangerous it is. One measure of this is beta (known as "market risk"), based on the statistical property of covariance. Beta larger than 1 indicates greater market risk and vice versa.

 
Beta helps us understand the concepts of negative and positive risk. The chart below shows a time series of returns (each data point named "+") for a given portfolio R (p) versus the market return R (m). Returns are adjusted in cash, so the point at which the x and y axes intersect is the equivalent cash return. Plotting a line of best fit through the data points allows us to identify passive (beta) and active (alpha) risks.

 

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Regression line is its beta. For example, the color gamut of 1.0 indicates that for every unit of increase in market return, portfolio return also increases by one unit. A money manager who uses a passive management strategy can try to increase the return of a portfolio by taking on more market risk (i.e. beta greater than 1) or reduce portfolio risk (and return) instead by reducing portfolio beta to less than 1.

 

Alpha and Active Risk Management

If market level or systemic risk is the only influencing factor, then portfolio return will always be equal to the beta adjusted market return. Of course, this is not the case: returns vary due to a number of factors unrelated to market risk. Investment managers who follow an active strategy bear other risks of generating returns in excess of market performance. Active strategies include tactics that enhance stock selection, sector or country, fundamental analysis, position sizing, and technical analysis.

 

Maximum drawdown (MDD) is the maximum observed loss from peak to bottom of the portfolio, before reaching a new peak. The maximum drawdown is an indication of downside risks over a specified period of time.

 

 

It can be used as a standalone metric or as an input to other metrics such as "return over maximum withdrawal" and the Calmar ratio. The maximum drawdown is expressed in terms of percentage.

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The equation for maximum regression is

MDD =

Peak value

Trough value - the maximum value

 

 

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Understand the maximum drawdown

The maximum drawdown is a specific measure of retracement that looks for the largest movement from a high to a low, before reaching a new high. However, it is important to note that it only measures the size of the largest loss, without taking into account the frequency of large losses. Since it only measures the largest decline, the MDD does not indicate how long it took the investor to recover from a loss, or whether the investment recovered at all.

 
Maximum Drawdown (MDD) is an indicator used to assess the relative risk of one stock check strategy against another, as it focuses on capital preservation, and is a major concern of most investors. For example, two screening strategies can have the same average outperformance, tracking error, and volatility, but the maximum regression compared to benchmark may be very different.

 

The lower limit is preferred as this indicates that losses from the investment were small. If the investment did not lose a penny, the maximum drawdown would be zero. The worst possible drawdown would be 100%, which means the investment is absolutely worthless.

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MDD must be used in the right perspective to get the most benefit from it. In this regard, special attention should be paid to the time period under consideration. For example, the US gamma default long-term fund has been around since 2000, and the maximum drawdown from it was -30% in the period ending 2010. While this might appear like a heavy loss, note that the S&P 500 has declined further. More than 55% from its October 2007 peak to its lowest level in March 2009. While other metrics should be taken into account to assess the overall performance of the Gamma Fund, from the point of view of MDD, it outperformed by a huge margin.

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The main concerns

Maximum Drawdown (MDD) is a measure of the largest decline in an asset's price from high to low.

The maximum drawdown is an indication of downside risk, as the larger MDDs indicate that bearish moves can be volatile.

While MDD measures the largest loss, it does not take into account the frequency of losses, not the magnitude of any gains.

Example of maximum drawdown

Consider an example to understand the concept of maximum drawdown. Assume an investment portfolio has an initial value of $ 500,000. The portfolio increased to $ 750,000 over a period of time, before dropping to $ 400,000 in a fierce bear market. It then bounces to $ 600,000, before dropping again to $ 350,000. Consequently, it doubled to $ 800,000. What is the maximum drawdown?

 

The maximum drawdown in this case is

=

$ 750K = 53.33%

$ 350,000 to $ 750,000

 

 

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Note the following points:

 

The initial peak of $ 750,000 is used for the MDD account. The temporary peak of $ 600,000 has not been used, as it does not represent a new high. The new peak of $ 800,000 has also not been used since the original drawdown of the $ 750,000 peak began.

The MDD account takes into account the lowest portfolio value ($ 350,000 in this case) before reaching a new peak, not just the first drop to $ 400,000.

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