Portfolio Watch: 20 August 2020
Each week I'll try to learn something new about investments and apply that to my own portfolio.
Earnings Per Share
Earning per share is a financial ratio that shows how much profit each share earned. This should give you an idea on how much money you could earn from owning that share. But this doesn't really tell you much on it's own. This ratio must be compared to the earnings per share (EPS) of other listed companies in the same industry.
There are two ways to calculate EPS:
- EPS = (Net Income – Preferred Dividends) / End of period Shares Outstanding
- EPS = (Net Income – Preferred Dividends) / Weighted Average Shares Outstanding
Price Earnings Ratio
The other challenge with comparing companies, even in the same industry, they still differ in a number of factors. The Price Earnings Ratio tries to put companies on an equal footing by factoring in the price of the share. This ratio is used together with EPS.
P/E = Stock Price Per Share / Earnings Per Share
P/E = Market Capitalization / Total Net Earnings
Firstrand Limited - my stock
This is the EPS and P/E Ratio of Firstrand Limited, the first of three stocks I bought when I opened by EasyEquity account. I didn't know what I was doing. I just wanted stock in a bank and I thought why not choose my bank. I bank with them for a good reason, why not have an invested interest in their well-being.
But now I'll put that stock under the microscope and apply what I've learned about EPS and P/E ratio. Below are the ratios of all the other banks listed on the JSE.
EPS: 1749.31 P/E Ratio: 4.32
EPS: 5427.67 P/E Ratio: 15.61
EPS: 2603.56 P/E Ratio: 3.93
EPS: 21.38 P/E Ratio: 6.22
EPS: 1768.14 P/E Ratio: 5.87
The sector's average P/E is 7.21. Capitec and Firstrand's P/E ratio is higher than that, meaning that investors have higher expectations for future earnings growth and will pay more for it. Stocks with a high P/E ratio is considered growth stock and is seen as a risky investment.
Looking at the EPS of Capitec, it almost makes sense that the P/E ratio is that high. But I'm not too sure why Firstrand has such a high P/E ratio. Maybe, like me, investors like the bank because of the products and services they offer.
Knowing what I know now about these two ratios, I would've probably bought Nedbank shares instead of Firstrand because of the P/E ratio. Its the lowest in the sector, so you get more bang for your buck. And they also have the second highest earnings.
But before I just dump my Firstrand shares, I'll wait for it to at least hit the R40 price mark so that I can at least make a bit of a profit. Maybe even wait to earn some income.
I also want to learn more about the other ratios out there. Maybe Nedbank isn't such a great stock to buy. Why else would it be so cheap (earnings-wise).
Last week my portfolio showed a growth of 6.51% but this week its at 4.28%. I'm not stressed at all. It looks like the whole market wasn't doing too great. Lots of red everywhere. Since I'm looking for growth, I'm not worried, for now. But I randomly picked one or two stocks and the others I got some tips from friends I trust. This will change the more I learn about investments.
Next week I'm getting paid, so it means I can invest in the market. I'll review some ETFs next week. I already have an idea on which ones I want to buy. However, I'll look at the EPS, P/E and any new ratio I chose to learn next week.
That's it for this week. Until next time. Thanks for reading.