Basic Investment Analysis Tools

Price to Earnings Ratio P/E

One of the most commonly used indicators for evaluating whether the price of a stock is reasonable. P/E ratio equals to stock price per share divided by annual earnings per share, reflecting the payback period of an investment. If assuming that the earnings per share of a stock remains constant, a stock with 10x P/E reflects an investment payback period of 10 years. As PE multiple is different among industries, investors should make a side-by-side comparison for companies within the same industry. Investors are also advised to use forward P/E for investment evaluation, which equals to stock price per share divided by forecasted earnings per share.

Price to Book Ratio P/B

Commonly used in evaluating the value of a bank, P/B ratio equals to stock price per share divided by book value per share. If P/B is greater than 1, the stock is trading at a premium to its book value; If P/B is less than 1, the stock is trading at a discount to its book value, implying the stock price is relatively lower. As a bank’s assets are mainly composed of loans, book value can reflect a bank’s capital level and operating capacity, thus P/B ratio should be used for analyzing financial stocks.

Price/Earnings to Growth Ratio PEG

PEG equals to P/E ratio of a company divided by its earnings growth rate. If PEG is less than 1, the valuation of a company may be undervalued; If PEG is greater than 1, the valuation of a company may be overvalued. As P/E ratio does not reflect a company’s future earnings growth forecast, PEG may make up the deficiency of using P/E ratio.

Debt Ratio

Calculated by dividing total liabilities by total assets, Debt Ratio reflects a company’s financial leverage. During economic downturn, highly leveraged enterprises will be particularly vulnerable, so investors should pay attention to a company’s debt ratio.

Return on Equity ROE

One of the important indicators of corporate profitability. ROE equals to after tax profits divided by net assets. Companies often reinvest earnings to seek for greater returns, ROE reflect the company’s ability to generate net profit using net assets.

Dividend Yield

An important measure to access whether a company is worth investing. Dividend Yield equals to annual dividend paid divided by market capitalization of a company. Dividend Yield is used to compare the relative attractiveness of different interest-bearing investment products, such as bonds or bank deposits.

Introduction of Equity Investment Risk

The stock market is ever-changing. FFG’s senior investment experts specialize in using different risk management tools to avoid various investment traps and unexpected crisis while striving for reasonable returns.

Systemic Risk

Originating from economic, political, social and geographical factors, systemic risk cannot be diversified through portfolio management. Investors should reduce exposure or stop loss in a timely manner in order to maintain profitability. FFG’s investment experts consistently evaluate global economic changes, and adjust client’s investment position during emergency situation to reduce investment risk.

Policy Risk

Market fluctuation results from changing national economic policy and regulation.

Interest Rate Risk

Risk arising from changing market interest rates as increase in interest rate will increase a company’s borrowing cost, resulting in lower investment value of a stock.

Currency Risk

When investing in foreign stock markets, the currency exchange rate will affect the return.

Sovereign risk

Financial market volatility due to political issues or natural disasters.

Market Risk

Market volatility of a specific financial market.

Unsystematic risk

Unsystematic risk is risk derived from specific industry or company, it can be diversified through portfolio management. Unsystematic risk is caused by specific factor, it does not affect the market as a whole. FFG’s investment experts strive to prevent investors to invest in high risk company and company with imbalance risk and return through professional analysis.

Operating Risk

Damage in profitability or even collapse due to poor management, bringing losses to investors.

Financial Risk

Risk arising from financial issues, such as liquidity crunch which leads to insolvency.

Moral Hazard

The unethical behavior done by the management of the company. Management may make decision for their own interests which affect other shareholders adversely.

Liquidity Risk

Insufficient liquidity of a stock causing shareholders hard to sell or sell at a higher cost.